Wednesday, March 11, 2009

Ilargi: I thought I’d leave you today with just some lines from the articles below. After all, what do I know? Sometimes the picture a few quotes paint is all you need. What I do want to say is that I see the potential for a huge rift between the US and EU when the G-20 meet in a few weeks. This rift can be used by both to institute protectionism on a scale we haven't seen for a long time, a development that is inevitable no matter what happens. The most dangerous short-term effect of it may be in how the demise of multinational corporations will be handled. Which could lead to economic or trade wars the scale of which we will find hard to absorb. Now that globalism, or, for that matter, capitalism, are dead, it will be very hard to find common ground with 5000 miles between the two. Both parties will have their hands full just dealing with keeping the peace between rival factions at home. As will China and Japan. As for the US, the avalanche of bond issues takes on dangerous shapes. Sovereign debt threatens to drive out states and municipalities' issuance to a degree nobody wants to imagine. Here you go:

• The cost of borrowing in dollars is rising as the global recession deepens and central bank efforts to prop up the financial system fail to prevent a growing number of banks from requiring government bailouts.

• The cost of buying protection against the risk that the United States will default on its mounting debt has surged in the past months, outpacing the rise in corporate-credit costs, now that the government has absorbed more private-sector debt. The spreads on credit-default swaps for U.S. government debt jumped to 97 basis points Tuesday, nearly seven times higher than a year ago and 60% higher than the end of last year,

• The government's $1 trillion program to spark consumer lending hit another roadblock when investors balked at signing an agreement required to participate in the program, arguing that it gave Wall Street dealers and the Federal Reserve too much power to look at their books and reject them from the program.

• The ink is barely dry on the $787 billion economic stimulus package enacted by Congress, and talk is already beginning on Capitol Hill of the need for a second measure to spur job growth.

• The $173 billion government rescue of American International Group Inc is stoking resentment among investors who see it as a backdoor taxpayer bailout of Goldman Sachs Group Inc and other banks.

• Sixteen years ago, two economists published a research paper with a delightfully simple title: "Looting."[..] In the paper, they argued that several financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses. In a word, the investors looted. Someone trying to make an honest profit, [..] would have operated in a completely different manner. The investors displayed a "total disregard for even the most basic principles of lending," failing to verify standard information about their borrowers or, in some cases, even to ask for that information. The investors "acted as if future losses were somebody else’s problem," the economists wrote. "They were right."

• FASB and the SEC say mark-to-market accounting is a key to the economy's transparency and want to proceed cautiously before changing the rules for illiquid assets. Investors are already skeptical of bank stocks. Add more uncertainty to their books and the shares might fall further. But with few options left to save the banks, government officials might see a change to mark-to-market rules as the most promising way remaining to bolster the banks and their bottom lines. What's more, relaxing the accounting requirement might make it easier for the Treasury to iron out a plan to remove toxic assets from bank balance sheets.

• "Between 40 and 45 percent of the world's wealth has been destroyed in little less than a year and a half," "This is absolutely unprecedented in our lifetime." But the U.S. government is committed to the preservation of financial institutions, he said, and will do whatever it takes to restart the economy.

• A wave of US companies are suspending payments to their staff 401(k) retirement plans in a bid to cut costs amid the economic downturn. Saks, General Motors, newspaper group McClatchy, clothing company J.Crew, FedEx, UPS, Coca-ColaBottling, Reader's Digest, Motorola, Regions Financial and Sprint Nextel are among the growing list of companies which have suspended contributions. [..] The growing number of suspensions appears to strike a blow against the viability of 401(k) plans, which were introduced 30 years ago as the main way that Americans should save for retirement, replacing defined benefit pension plans.

• Citigroup Inc. and Bank of America Corp.’s bond prices are sliding on concern that owners of debt issued by U.S. financial firms will be forced to swallow losses if the industry needs another bailout. U.S. bank debt has lost 7.8 percent and yields have jumped to record levels compared with benchmark rates in the past month, even after taxpayers committed more than $11.6 trillion to prop up financial firms.

• President Barack Obama's $3.6 trillion budget designates $36 billion for transportation infrastructure. State governors and legislatures should spend that money wisely -- and even more importantly, they should use the remaining $229 billion they're getting in stimulus money to put their fiscal houses in order. If they don't, they risk burdening their constituents with devastating taxes in the near future. Local and state governments face such peril in part because the federal government is about to saturate the market for U.S.-based debt -- including debt issued by municipalities -- as it props up failed financial institutions and distributes stimulus money. The federal government could overwhelm the credit markets. In the third quarter of 2008 alone, the amount of federal-government debt surged by 39%. This was "the largest quarterly growth rate recorded," the Federal Reserve recently reported.

• When Citicorp and Travelers Group agreed on a historic merger in 1998, the heads of the two companies placed a courtesy call to inform the Treasury Department. Then they held a news conference to suggest that Congress change the law to allow their union. Congress soon complied. It was a signature moment for a bank that has long taken big risks with the conviction that it is irreplaceable. Over the past century, Citigroup has repeatedly launched new strategies to make money, then stumbled and lost money, forcing the government to restore its health. The 1998 merger, an attempt to create a one-stop shop for financial projects, ultimately faltered. Citigroup, with the help of tens of billions of dollars in government aid, is now dismantling itself, leaving behind a company that will resemble the old Citicorp, a bank focused on serving multinational corporations. The company sits beneath the Treasury's thumb, its actions scrutinized by an angry Congress. Its market value, more than $140 billion at the time of the merger, is well below $10 billion.

• In many markets, "we are no longer competing with other builders. We are competing with foreclosures," said Steve Ruffner, president of the Southern California division of KB Home. Sales of used homes are actually rising in some regions because of foreclosures, but new-home sales fell to a four-decade low in January, down 77% from their peak in summer 2005. Altogether, home builders sold houses at a seasonally adjusted annual rate of 309,000 units in January, down from a peak of 1.4 million in July 2005.

• The latest U.S. government budget projects a staggering deficit of $1.75 trillion this year, and publicly held debt is expected to expand by $9.57 trillion, to $15.37 trillion, over the next decade. But as the U.S. government commits its full faith and credit to stemming financial panic and restoring the nation’s economy — and by extension that of the world — to vigorous health, its standing in the eyes of investors is plumbing unprecedented depths. As revealed in the semiannual Institutional Investor Country Credit survey, the U.S. sees its creditworthiness drop by 5.0 points, to 88.0, on a scale of zero to 100. It now ranks No. 15 among the 177 countries in the survey, one place behind Belgium.....

• Confidence in the world economy waned in March as the recession proved deeper than forecast and the U.S. mounted new rescues of financial institutions, a survey of Bloomberg users on six continents showed. The Bloomberg Professional Global Confidence Index fell to 5.95 from 8.5 in February. A reading below 50 means pessimists outnumber optimists. Sentiment about Europe and the U.S. slid, while respondents in Asia were less pessimistic about their region, the survey showed. German factory orders fell 38 percent in January from a year earlier, the government said today. The global economy may shrink for the first time since World War II, with trade collapsing by the most since the Great Depression, the World Bank said this month.

• Disagreements between the European Union and the US over how to combat the global recession widened on Tuesday as EU governments made clear they had little appetite for piling up more debt to fight the collapse in output and jobs. Finance ministers from the 27-nation bloc insisted in Brussels that it was doing enough to support world demand and did not need at present to adopt another fiscal stimulus plan, as Washington is urging. The US-European differences are casting a shadow over next month’s summit in London of leaders from the G20 group of advanced and emerging economies, an event to be attended by Barack Obama on his first visit to Europe as US president.

• The industrial downturn is accelerating and the British economy is on course for its worst year since 1931, the latest official figures suggest. The Office for National Statistics reported yesterday that manufacturing output fell by 6.4 per cent in the three months to January – an even faster rate of decline than the 4.9 per cent contraction seen in the quarter to December. The motor industry was one of the hardest-hit sectors – output falling by 10.6 per cent during the quarter. Overall, the annual rate of decline in output has reached an alarming 12 per cent.

• New data about is providing further evidence that the global recession is making the once mighty Chinese export machine sputter badly. After falling 17.5% in January, exports plunged a further 25.7% year-on-year in February, the government announced on Mar. 11. The drop was worse than what most analysts expected; a Merrill Lynch research note described it as "an ugly number."

Freddie Mac, still suffering from the lax mortgage-lending practices of the housing boom, reported a loss of $23.9 billion for the fourth quarter and said it will need a $30.8 billion injection of capital from the U.S. Treasury. The government-backed provider of funding for home mortgages also said it expects its provisions for losses on mortgage defaults to remain high this year. Freddie's quarterly loss compares with a loss of $2.45 billion a year earlier. For all of 2008, Freddie reported a loss of $50.1 billion, compared with a year-earlier loss of $3.1 billion. The losses over the past two years exceed the total of about $42 billion earned by the McLean, Va., company from 1971 through 2006.

Freddie blamed the losses on rising mortgage defaults and declines in the value of derivatives used to hedge against interest-rate risks and other securities. Freddie's rival, Fannie Mae, last month reported a $25.2 billion loss for the fourth quarter. The Treasury has agreed to provide as much as $200 billion of capital apiece to Fannie and Freddie in exchange for senior preferred stock. The Treasury already provided $13.8 billion to Freddie late last year, and Fannie has asked for $15.2 billion of capital under the same program. The Federal Housing Finance Agency, which regulates Fannie and Freddie, seized control of their managements in September as it became clear that growing losses would wipe out their thin layers of capital.

Federal officials now are running the companies as instruments of government policy, directing them to focus on preventing foreclosures even if that delays their ability to regain profitability. Freddie said its fourth quarter loss largely reflected a plunge of $11.8 billion in the market value of derivatives and a $4.7 billion drop in the value of its guarantee business, in which the company insures holders of mortgage-backed securities against losses from defaults. The value of the derivatives varies widely from quarter to quarter depending on fluctuations in interest rates. Credit-related expenses on Freddie's mortgage holdings totaled $7.2 billion. Freddie also wrote down the value of tax credits by $8.3 billion because its losses make it unlikely it will be able to use them.

The latest capital injection from the Treasury will bring Freddie's total draw from that source to $45.6 billion. In return, the Treasury will hold senior preferred stock paying annual dividends totaling about $4.6 billion, or 10% of the capital provided. Freddie also named John Koskinen as interim chief executive officer as it searches for a longer-term successor for David Moffett. The company announced last week that Mr. Moffett would resign no later than Friday. Mr. Koskinen has served as chairman of Freddie since September. He will be succeeded in that post by Robert F. Glauber, a director of Freddie since 2006. Before joining Freddie's board, Mr. Koskinen was president of the U.S. Soccer Foundation for four years and deputy mayor and city administrator of Washington, D.C., from 2000 to 2003.

The cost of borrowing in dollars is rising as the global recession deepens and central bank efforts to prop up the financial system fail to prevent a growing number of banks from requiring government bailouts. The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans stayed at 1.33 percent today, near the highest level in since Jan. 8 and up from this year’s low of 1.08 percent on Jan. 14, the British Bankers’ Association said. The Libor-OIS spread, a gauge of bank reluctance to lend, widened to the most since Jan. 9. Short-term borrowing costs are increasing as banks hoard cash and governments struggle to thaw credit markets after finance companies reported almost $1.2 trillion of writedowns and losses since the start of 2007.

Banco Popolare SC yesterday became Italy’s first lender to seek state aid. Lloyds Banking Group Plc, the U.K.’s largest mortgage provider, ceded control to the government March 7. U.S. regulators seized 17 failing banks so far this year. "The market is beginning to think that the solution is either not politically possible, or we can’t afford it, or maybe there isn’t a solution," said Bob Baur, chief global economist at Des Moines, Iowa-based Principal Global Investors, which manages $198 billion of assets. Libor’s rise "is just another indication of that concern," he said. The U.S. committed about $10 trillion to combat the financial crisis that started in August 2007 as losses on securities tied to subprime mortgages caused credit markets to seize up.

European governments put up more than 1.2 trillion euros ($1.5 trillion) to protect their banking systems. Rising Libor shows banks remain skittish 19 months later because they still don’t know if they can trust each other, said Soren Elbech, treasurer of the Inter-American Development Bank, a Washington-based lender to Latin American and Caribbean countries. Libor is used to calculate rates on $360 trillion of financial products worldwide, according to the Bank for International Settlements in Basel, Switzerland. "Counterparty risk appetite is something that’s very much" on investors’ minds, Elbech said in a phone interview yesterday.

The stress is reflected in the so-called Libor-OIS spread, which measures the gap between three-month Libor in dollars and the overnight index-swap rate, or what traders expect the Federal Reserve’s target rate for overnight loans between banks to average during the term of the contract. That spread averaged 11 basis points from December 2001 to July 2007, and soared to 364 basis points in the weeks following the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc. Libor- OIS was 107 basis points yesterday. A basis point is 0.01 percentage point. Contracts in the forward market show traders expect the spread to narrow to 85 basis points in a year, according to data compiled by Tullett Prebon Plc, the second-biggest broker of transactions between banks after ICAP Plc.

While the gap is forecast to shrink, Alan Greenspan, chairman of the Federal Reserve from August 1987 to January 2006, said in June he won’t consider markets back to "normal" until Libor-OIS falls to 25 basis points. Dollar Libor for three months rose for 11 days through yesterday as banks sought cash to cover commitments through the end of the first quarter. "The liquidity will be horrible in the next couple of weeks," Vincent Chaigneau, head of international rates strategy at Societe Generale SA in London, said yesterday. While stocks around the world staged their biggest one-day rally of the year yesterday after Citigroup Inc. said it was having its best quarter since 2007, credit markets weakened.

The extra yield investors demand to own U.S. corporate bonds instead of Treasuries rose to 8.09 percentage points, the most since December and up from the low this year of 7.03 percentage points on Feb. 11, according to Merrill Lynch & Co. index data. Wider borrowing spreads show growing concern about corporate defaults as the recession worsens. The global economy will contract this year in what can be called the "great recession," Dominique Strauss-Kahn, managing director of the International Monetary Fund, said in a speech to African central bank governors and finance ministers in Dar es Salaam, Tanzania, yesterday. "The IMF expects global growth to slow below zero this year, the worst performance in most of our lifetimes," Strauss- Kahn said. "Continuing deleveraging by world financial institutions, combined with the collapse in consumer and business confidence, is depressing domestic demand across the world."

Strauss-Kahn later told France 24 Television it may make sense to nationalize some U.S. banks. "The debate over nationalization certainly exists in the U.S.," Strauss-Kahn said. For some banks "this would be a good solution," he said, without naming specific financial companies. The Federal Deposit Insurance Corp. classified 252 banks as a "problem" in the fourth quarter, up 47 percent from the third quarter. Fed Chairman Ben S. Bernanke said yesterday in Washington that if officials can make financial markets "reasonably stable" then "there’s a good chance that the recession will end later this year, and that 2010 will be a period of growth."

The Fed chief, answering questions after a speech, prefaced his comment by saying his "forecasting record on this recession is about the same as the win-loss record of the Washington Nationals," the worst team in U.S. Major League Baseball last year with 59 wins and 102 losses. Bernanke said that a 10 percent U.S. unemployment rate is "well within the realm of possibility" and is part of the "adverse" second scenario for so-called stress tests that regulators are performing on the 19 largest American banks to determine how much more capital the government will provide.

The cost of buying protection against the risk that the United States will default on its mounting debt has surged in the past months, outpacing the rise in corporate-credit costs, now that the government has absorbed more private-sector debt. The spreads on credit-default swaps for U.S. government debt jumped to 97 basis points Tuesday, nearly seven times higher than a year ago and 60% higher than the end of last year, to a level roughly in line with those of France, according to data supplied by Markit. The spreads also hit a record last week. In contrast, an index that tracks the cost of buying credit protection against defaults on North American companies with investment-grade ratings -- the Markit CDX.NA.IG index -- has not even doubled in the past year.

The index, which includes CDS on blue-chip companies like Altria Group and Bristol-Meyers Squibb Co. has risen 30% this year. Higher spreads on credit-defaults swaps indicate sellers have raised the price of guaranteeing protection because they perceive the likelihood of a default as higher. A spread of 97 means it would cost about $97,000 to buy protection on $10 million in U.S. government debt. The rise in U.S. sovereign CDS spreads reflects the increasingly active role the United States has played in debt markets, according to Bank of America Securities analysts. In the past year, it's absorbed the toxic assets that led to Bear Stearns' collapse; taken mortgage-backed and asset-backed securities as collateral for loans; and bought commercial paper and agency debt, among other moves.

"Having effectively guaranteed the short-term markets, that risks shifts to the government," wrote Bank of America Securities-Merrill Lynch analysts led by Jeffrey Rosenberg, in a note issued early Tuesday. The rising costs to buy credit protection undermine hopes that credit markets are improving -- a turnaround that could set up the U.S. economy and stock market for revival. Such costs also reflect an increase in money spent buying the type of complicated derivatives that sent American International Group Inc., a seller of credit-default swaps, to ask for several rounds of bailout money last year -- one of the series of shockwaves that have hit the financial system. The chance that a seller of CDS won't be able to make good on its commitment to cover an underlying entity's debt default, or what's known as counterparty risk, prompted "Black Swan" author and investor Nassim Taleb to describe CDS purchases as tantamount to buying insurance on the Titanic from someone on the Titanic.

Other gauges that track costs of credit protection also have been rising lately. An index that tracks the costs of credit protection of 14 leading banks and brokerages -- including Bank of America Corp., Citigroup Inc., Goldman Sachs Group, and J.P. Morgan Chase & Co., -- hit a record high Monday, according to index publisher Credit Derivatives Research. Spreads on U.S. sovereign CDS hit a record 100 basis points last week, Markit said. Records aren't tough to come by in this relatively new market, though. Markit's vice president in credit research, Gavan Nolan, estimates that U.S. sovereign credit-default swaps have been trading with significant volume only in the past year and a half. Over the past year, U.S. and European central banks have taken unprecedented steps to prop up the financial system.

The U.K. government has nationalized or bought large stakes in struggling lenders Northern Rock, Royal Bank of Scotland and Lloyds Banking Group, and is buying government bonds to drive down rates. Last month, the U.K. Office for National Statistics said the government injections into Lloyds and RBS would drive up the public sector's debt to as much as 1.5 trillion pounds -- or 100% of gross domestic product. The United Kingdom's CDS spreads have vaulted to about 160 basis points, up 50% from the start of the year. That ranks the cost of buying credit protection on U.K. government debt as the second highest among G7 countries, behind Italy. Federal Reserve Chairman Ben Bernanke on Tuesday reiterated the central bank's commitment to taking a heavy role in the banking system, saying major financial institutions would not be allowed to fail given the fragile state of financial markets. Read more on Bernanke. "By effectively transferring the risks underlying the credit crisis to governments, sovereign risk becomes the focal point for credit uncertainty," the Bank of America analysts concluded. "On the road to recovery, now paved with sovereign risk."

The government's $1 trillion program to spark consumer lending hit another roadblock when investors balked at signing an agreement required to participate in the program, arguing that it gave Wall Street dealers and the Federal Reserve too much power to look at their books and reject them from the program. Through the Term Asset-Backed Loan Facility, or TALF, program, an investor can put down $5 to $14 for every $100 it will put up, borrowing the remaining $95 to $86 cheaply from the Fed. They agree to buy eligible, highly rated securities issued by lenders making loans to businesses and consumers to buy cars, pay for their educations or use credit cards. The amount of money an investor must initially fork over varies depending upon the types of loans backing the security.

The Fed-and-Treasury-backed program is set to begin next week, but it faces the tough task of getting potentially hundreds of financial firms to agree on the wording of the contracts. Some of the issues bogging down the lawyers involved include how the dealers will protect themselves if an investor accidentally or purposefully misrepresents something about themselves as a solid borrower. Investors, particularly hedge funds, are bristling over language about how the Fed or dealers may decline their application, and that the Fed or any agency it deems appropriate may decide to comb through an investors' books or query any documents if and when it chooses. The 40-page document would uniformly govern terms of deals despite the different circumstances of every investor and each bank involved.

The document was developed by financial industry trade group Sifma, or the Securities Industry and Financial Markets Association, and the American Securitization Forum, whose members include participants in the structured-finance markets. The goal of creating one agreement was to streamline the process for dealers and investors given the time constraints, says Rob Toomey, managing director and associate general counsel at Sifma. TALF has been bogged down with delays for months, as investors and issuers negotiated with the Fed and the Treasury to adjust the terms of the loans. Now, with next Tuesday's deadline looming for investors to request their first loans, bankers and investors say they feel the initiative may be moving too fast.

Hanging in the balance are plans for several deals that bankers hoped to include in the first round of offerings sold under the Fed's program, including: auto lender World Omni's expected $750 million deal; a deal for auto-loan-backed securities from Ford Motor Credit; and offerings from the finance arms of Nissan Motor Co. and used-car retailer CarMax Inc., say bankers. World Omni, CarMax, and Nissan and Ford declined to comment. TALF was initially launched last November, and the government trickled out few details about it until this February, when the program became a marquee feature of Treasury Secretary Timothy Geithner's revamped plans to stabilize the financial system. Mr. Geithner announced the program would expand from its initial $200 billion focus on consumer lending to $1 trillion, encompassing loans to investors to buy residential and commercial mortgage-backed securities.

The ink is barely dry on the $787 billion economic stimulus package enacted by Congress, and talk is already beginning on Capitol Hill of the need for a second measure to spur job growth. Speaker Nancy Pelosi (D., Calif.) said Tuesday that lawmakers must give the just-approved package of tax cuts and government spending a chance to work. The bulk of the funds from the $787 billion package are flowing out of government coffers over the next two years, in hopes of lifting the economy of its downward spiral. But Mrs. Pelosi suggested she's not ruling out action on another measure if the economy remains weak. "We have to keep the door open," Rep. Pelosi said after a closed-door meeting with several private economists.

The speaker stressed the goal of lawmakers is not just to spur job growth, but to shore consumer and business sentiment, as well. "The word of the day is confidence," she said. "Confidence in our markets, confidence in lending, confidence in our financial institutions." Congressional aides were quick to stress that no plans are being prepared for imminent action on a second stimulus package, and Mrs. Pelosi offered no details about what might be included in such a measure. But the mere suggestion that Congress stands ready to act again on a stimulus package underscores the depth of concern about the economy on Capitol Hill.

The speaker's meeting with the economists, who included Mark Zandi, chief economist of Moody's Economy.com, came as Democratic leaders are readying action on President Barack Obama's $3.6 trillion budget. Party leaders hope to push the budget through the House and Senate by early April, setting the stage for action on the myriad bills needed to implement the Obama agenda, including measures to combat climate change and widen access to health care. Senate Budget Chairman Kent Conrad (D., N.D.) warned that unease is growing among Democrats with the budget, which proposes to increase domestic spending and includes several new tax increases. Sen. Conrad urged Democrats to move cautiously. "Please don't be drawing lines in the sand," he said Tuesday at a Budget Committee hearing.

The $173 billion government rescue of American International Group Inc is stoking resentment among investors who see it as a backdoor taxpayer bailout of Goldman Sachs Group Inc and other banks. Six months after the U.S. government stepped in save an insurance giant overwhelmed by derivative losses, AIG continues to bleed red ink. Its stock and bond holders have been crushed, but one group has suffered almost no damage: banks that bought credit protection from AIG Financial Products. Regulatory filings show that since the Federal Reserve announced its rescue of AIG on September 15, about $50 billion of government money has passed through the company to banks.

"Treasury is providing a massive wealth transfer from taxpayers to Goldman Sachs and other parties and it's something that absolutely should be investigated," said Eric Hovde, chief executive of Hovde Capital Advisors, where he manages financial services-focused hedge funds. Once the world's largest and most powerful insurance company, AIG for more than a decade aggressively insured credit and mortgage exposure for banks around the world. At its peak, AIG was backstopping a $2 trillion derivatives trading business. That business proved its undoing when credit markets broke down in 2007, leaving AIG on the hook for huge losses. At the year-end, it had $302 billion of outstanding credit default swaps, which are contracts that insure against debt default.

Filings show that, in the final months of 2008, as it unwound its money-losing credit derivative portfolio, AIG purchased from banks $46.1 billion of assets underlying swaps. With government financing, it paid $20.1 billion cash and surrendered $25.9 billion of collateral -- a 99.8 percent recovery rate. On the September weekend that investment bank Lehman Brothers Holdings Inc collapsed, the U.S. Treasury and Federal Reserve arranged an unprecedented insurance company bailout: $85 billion in loans for AIG in exchange for an 80 percent stake in the company. The Treasury and the Fed worried that an AIG collapse could further drag down world financial markets. As markets continued to deteriorate and AIG's derivative losses mounted, Uncle Sam extended ever-more-lenient rescue packages.

The bailout has stirred resentment not just in the U.S. Congress, but on Wall Street, where investors speculate that Goldman and its connections helped it get a better deal. "The whole point of the bailout is to save Goldman Sachs," said Christopher Whalen, head of financial advisory services for Institutional Risk Analytics. "The whole thing is so rancid and so hideous." A Goldman Sachs spokesman declined to comment on the AIG bailout or what government funds it received. Goldman CFO David Viniar in September and in December told investors the firm had no material losses from AIG. The bank says its AIG exposure was either collateralized or hedged. Last week, AIG Chief Executive Edward Liddy told investors "the vast majority" of taxpayer funds "passed through AIG to other financial institutions" as it unwound transactions.

During a hearing in Washington last week, legislators demanded the Federal Reserve identify the financial firms that received money from AIG. Fed vice chairman Donald Kohn refused. The Wall Street Journal, citing unnamed sources, reported on Saturday that more than $50 billion of payments went to counterparty banks between September and December. Goldman and Deutsche Bank AG were the largest trading parties, each receiving about $6 billion, the newspaper said. Goldman has been singled out by critics who question why Chief Executive Lloyd Blankfein attended meetings that discussed a bailout of AIG. A Goldman spokesman said Blankfein, at the invitation of then-Federal Reserve Bank of New York President Tim Geithner, attended a meeting at the Fed, along with co-President Jon Winkelried and a group of investment bankers to discuss a private sector solution for AIG. Blankfein left the meeting after about 15 minutes, he said.

Once it was determined that a private sector bridge loan for AIG was not possible, the remaining Goldman executives left, he said. There was no discussion of a government bailout while Goldman people were in attendance, the spokesman added. Other bankers meeting with the Fed that Monday were James Lee, vice chairman of JPMorgan Chase & Co, AIG's advisers; then-Morgan Stanley President Robert Scully, an adviser to the U.S. government; and Eric Dinallo, head of New York State's Insurance Department. Critics have also pointed out that then-Treasury Secretary Henry Paulson, who left Goldman in 2006 as CEO, played a lead role in the government's rescue efforts. Meanwhile, the chairman of the New York Fed is former Goldman head Steve Friedman.

The results, investors say, have been poor. With no end in sight for the losses, some investors argue taxpayers would be better off letting AIG go bankrupt. "AIG should be put through bankruptcy and the federal government should stop funding of all these losses," Hovde said. "I'm opposed to seeing parties that should be taking some financial consequences walking away free and clear off the taxpayer's back." Seacliff Capital LLC President James Ellman, who manages a financial services hedge fund, said the government could take over the AIG derivatives portfolio. While that would wipe out stockholders and generate losses, the government could then sell off AIG's healthy insurance businesses to investors. That may be preferable to the government's latest bailout, announced last Monday, which effectively cut the interest and dividend payments AIG must make to the government. The cost to taxpayers is about a billion dollars a year.

"We have the Fed chairman saying he's angry with AIG and yet he consistently rewrites the bailout to make it worse for us and better for a party which is increasingly in a weaker bargaining position," said Ellman. Whalen, who once ran foreign exchange trading at the New York Fed, concurred that markets would be better served by forcing AIG into liquidation and following the model set by Lehman. Unlike Bear Stearns and AIG, Lehman was not rescued and filed for bankruptcy on September 16. While many analysts say this event sparked last year's market free fall, the bank's toxic assets are being sold off while healthy businesses found new homes. Keeping sick patients such as Citigroup Inc and AIG on life support, investors say, only increases the risks for taxpayers. "Every time the government tries to save us, they make the problem worse," Whalen said. "We should just get on with it, resolve AIG now and get them into a restructuring. If we don't, we will muddle through this crisis for a decade."

Sixteen years ago, two economists published a research paper with a delightfully simple title: "Looting." The economists were George Akerlof, who would later win a Nobel Prize, and Paul Romer, the renowned expert on economic growth. In the paper, they argued that several financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses. In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner.

The investors displayed a "total disregard for even the most basic principles of lending," failing to verify standard information about their borrowers or, in some cases, even to ask for that information. The investors "acted as if future losses were somebody else’s problem," the economists wrote. "They were right." On Tuesday morning in Washington, Ben Bernanke, the Federal Reserve chairman, gave a speech that read like a sad coda to the "Looting" paper. Because the government is unwilling to let big, interconnected financial firms fail — and because people at those firms knew it — they engaged in what Mr. Bernanke called "excessive risk-taking." To prevent such problems in the future, he called for tougher regulation.

Now, it would have been nice if the Fed had shown some of this regulatory zeal before the worst financial crisis since the Great Depression. But that day has passed. So people are rightly starting to think about building a new, less vulnerable financial system. And "Looting" provides a really useful framework. The paper’s message is that the promise of government bailouts isn’t merely one aspect of the problem. It is the core problem. Promised bailouts mean that anyone lending money to Wall Street — ranging from small-time savers like you and me to the Chinese government — doesn’t have to worry about losing that money. The United States Treasury (which, in the end, is also you and me) will cover the losses. In fact, it has to cover the losses, to prevent a cascade of worldwide losses and panic that would make today’s crisis look tame.

But the knowledge among lenders that their money will ultimately be returned, no matter what, clearly brings a terrible downside. It keeps the lenders from asking tough questions about how their money is being used. Looters — savings and loans and Texas developers in the 1980s; the American International Group, Citigroup, Fannie Mae and the rest in this decade — can then act as if their future losses are indeed somebody else’s problem. Do you remember the mea culpa that Alan Greenspan, Mr. Bernanke’s predecessor, delivered on Capitol Hill last fall? He said that he was "in a state of shocked disbelief" that "the self-interest" of Wall Street bankers hadn’t prevented this mess. He shouldn’t have been. The looting theory explains why his laissez-faire theory didn’t hold up. The bankers were acting in their self-interest, after all.

The term that’s used to describe this general problem, of course, is moral hazard. When people are protected from the consequences of risky behavior, they behave in a pretty risky fashion. Bankers can make long-shot investments, knowing that they will keep the profits if they succeed, while the taxpayers will cover the losses. This form of moral hazard — when profits are privatized and losses are socialized — certainly played a role in creating the current mess. But when I spoke with Mr. Romer on Tuesday, he was careful to make a distinction between classic moral hazard and looting. It’s an important distinction. With moral hazard, bankers are making real wagers. If those wagers pay off, the government has no role in the transaction. With looting, the government’s involvement is crucial to the whole enterprise.

Think about the so-called liars’ loans from recent years: like those Texas real estate loans from the 1980s, they never had a chance of paying off. Sure, they would deliver big profits for a while, so long as the bubble kept inflating. But when they inevitably imploded, the losses would overwhelm the gains. As Gretchen Morgenson has reported, Merrill Lynch’s losses from the last two years wiped out its profits from the previous decade. What happened? Banks borrowed money from lenders around the world. The bankers then kept a big chunk of that money for themselves, calling it "management fees" or "performance bonuses." Once the investments were exposed as hopeless, the lenders — ordinary savers, foreign countries, other banks, you name it — were repaid with government bailouts.

In effect, the bankers had siphoned off this bailout money in advance, years before the government had spent it. I understand this chain of events sounds a bit like a conspiracy. And in some cases, it surely was. Some A.I.G. employees, to take one example, had to have understood what their credit derivative division in London was doing. But more innocent optimism probably played a role, too. The human mind has a tremendous ability to rationalize, and the possibility of making millions of dollars invites some hard-core rationalization. Either way, the bottom line is the same: given an incentive to loot, Wall Street did so. "If you think of the financial system as a whole," Mr. Romer said, "it actually has an incentive to trigger the rare occasions in which tens or hundreds of billions of dollars come flowing out of the Treasury."

Unfortunately, we can’t very well stop the flow of that money now. The bankers have already walked away with their profits (though many more of them deserve a subpoena to a Congressional hearing room). Allowing A.I.G. to collapse, out of spite, could cause a financial shock bigger than the one that followed the collapse of Lehman Brothers. Modern economies can’t function without credit, which means the financial system needs to be bailed out. But the future also requires the kind of overhaul that Mr. Bernanke has begun to sketch out. Firms will have to be monitored much more seriously than they were during the Greenspan era. They can’t be allowed to shop around for the regulatory agency that least understands what they’re doing. The biggest Wall Street paydays should be held in escrow until it’s clear they weren’t based on fictional profits. Above all, as Mr. Romer says, the federal government needs the power and the will to take over a firm as soon as its potential losses exceed its assets. Anything short of that is an invitation to loot.

Mr. Bernanke actually took a step in this direction on Tuesday. He said the government "needs improved tools to allow the orderly resolution of a systemically important nonbank financial firm." In layman’s terms, he was asking for a clearer legal path to nationalization. At a time like this, when trust in financial markets is so scant, it may be hard to imagine that looting will ever be a problem again. But it will be. If we don’t get rid of the incentive to loot, the only question is what form the next round of looting will take. Mr. Akerlof and Mr. Romer finished writing their paper in the early 1990s, when the economy was still suffering a hangover from the excesses of the 1980s. But Mr. Akerlof told Mr. Romer — a skeptical Mr. Romer, as he acknowledged with a laugh on Tuesday — that the next candidate for looting already seemed to be taking shape. It was an obscure little market called credit derivatives.

To fix the banks Washington needs to get the toxic assets off the banks' balance sheets. That's easily said, but not so easily done. One reason is an obscure accounting rule that is the subject of intense lobbying by representatives of the banking industry ahead of Congressional hearings Thursday on the matter. A change to that rule could drain some of the banks' red ink and possibly make it easier for them to offload the toxic assets. Fair value accounting, also known as "mark-to-market" accounting, requires banks to price assets on their balance sheets according to what you can sell them for on the open market. Seems logical enough. But how do you mark to market when the market is effectively shut down?

At the moment, there are few buyers for the toxic assets that are poisoning Citigroup, Bank of America and other major financial players. The unsellable loans sit on the banks' balance sheets at a huge loss, priced from zero to an optimistic 60% of what they might have sold for before the crash. It's not clear where the banks are getting their prices. Some of the firms derive the asset values from financial models. Others try to gauge how much a group of sub-prime mortgage loans might be worth by looking at a price index, called the ABX, of related credit default swaps.

But at a time of pessimistic forecasts and rising fear, many toxic assets are likely worth more than the bank models or credit-default-swaps indexes suggest. For example a recent reading of the ABX index puts the value of even the highest rated sub-prime mortgage bonds created in 2007 at only 27% of their pre-crunch prices. Yes, Americans are behind on their mortgages, but even the most pessimistic prognostications do not predict that 73% of home loans will become worthless. That's why the banking industry has been lobbying furiously to alter the accounting requirement that forces them to continue to lower the value of those assets, even though many of the loans that back those bonds have yet to default, and perhaps never will.

Those losses are amplifying the bottom line losses at a number of the nation's largest banks, wiping out their capital and putting them ever closer to collapse. A growing number of regulators seem to think some relaxation of the rules may make sense. The top U.S. banking supervisor, Comptroller of the Currency John Dugan, tells TIME he is in favor of letting the banks mark back up the value of some of their toxic assets. "I think there are some changes that ought to be made," Dugan says. Mark-to-market accounting is a problem, he says, for illiquid assets because "those things have just stopped trading altogether." Dugan does not support doing away with mark-to-market entirely; not even industry lobbyists want that. But his deputy will argue at the Congressional hearings Thursday that limited changes affecting the pricing of illiquid toxic assets should be made.

Others seem to be coming around to the banking industry's position. On Tuesday, Federal Reserve chairman Ben Bernanke said he would support changes in pricing illiquid assets. Also this week, investor Warren Buffett said on a CNBC interview that he would favor suspending the mark-to-market rules. Even the Securities and Exchange Commission, which has long backed these rules, recently asked the Financial Accounting Standards Board, a private, Norwalk, CT-based group that sets accounting rules in the U.S., to look into the matter. FASB spokesman Neal McGarity says his organization is doing that, but the banking industry is skeptical and wants more pressure from the SEC. "SEC is refusing to act further on this issue," says Scott Talbott, a top bank lobbyist.

Why the resistance? FASB and the SEC say mark-to-market accounting is a key to the economy's transparency and want to proceed cautiously before changing the rules for illiquid assets. Investors are already skeptical of bank stocks. Add more uncertainty to their books and the shares might fall further. But with few options left to save the banks, government officials might see a change to mark-to-market rules as the most promising way remaining to bolster the banks and their bottom lines. What's more, relaxing the accounting requirement might make it easier for the Treasury to iron out a plan to remove toxic assets from bank balance sheets.

The Treasury Department is looking into purchasing those assets, whether through a public-private partnership or through some other mechanism. Part of the stumbling block is price. Paying more than the banks are able to say the assets are worth would certainly lead to criticism that the government is providing another massive handout to the banking industry. But if the banks are allowed to market the toxic assets back up to their original pre-crunch prices or close to it, that would give the Obama administration political cover: Treasury can come in and underbid the value of the toxic assets, declaring before Congress and the taxpayers that it is driving a hard bargain with the banks. What price might Treasury offer? Treasury Secretary Timothy Geithner is currently doing a "stress test" of the banks to determine how much capital they need to survive: whatever number that ends up being might be a good price for the toxic assets. "We want to get the assets off our books," says Scott Talbott.

Some U.S. firms are not exercising enough judgment when applying mark-to-market accounting standards, a board member of the Financial Accounting Standards Board said on Wednesday. Lawrence Smith also said the accounting standards setter will "in the real short term" issue guidance on mark-to-market, or fair value, accounting that will address whether a market is active or inactive and whether a transaction is distressed.

"We do have some problems ... in fair value accounting," Smith told a U.S. Chamber of Commerce conference. "It seems like people are not exercising as much judgment as they could have." But he said the vilification of mark-to-market accounting is overblown, saying it was not the cause of the financial crisis and is not as prominent in valuing assets as some people believe. Some lawmakers and the U.S. banking industry, which has been forced to write down billions of dollars' worth of hard-to-value assets in the illiquid markets, have pleaded for a suspension or modification of mark-to-market accounting rules.

Don Nicolaisen, the former chief accountant at the U.S. Securities and Exchange Commission, told the conference that finding an alternative to mark-to-market accounting would not be easy. "I haven't really heard a lot of explanation of what would be the right approach," Nicolaisen said. He said using a historical cost model would not be a good method. But Paul Boyle, chief executive of the United Kingdom's Financial Reporting Council, said mark-to-market accounting is simply an accurate reflection of the financial crisis. "The valuations are horrible because the products were truly horrible," Boyle said.

We are in the midst of a global crisis that will unquestionably rank as the most virulent since the 1930s. It will eventually subside and pass into history. But how the interacting and reinforcing causes and effects of this severe contraction are interpreted will shape the reconfiguration of our currently disabled global financial system. There are at least two broad and competing explanations of the origins of this crisis. The first is that the "easy money" policies of the Federal Reserve produced the U.S. housing bubble that is at the core of today's financial mess. The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages. Between 2002 and 2005, home mortgage rates led U.S. home price change by 11 months. This correlation between home prices and mortgage rates was highly significant, and a far better indicator of rising home prices than the fed-funds rate.

This should not come as a surprise. After all, the prices of long-lived assets have always been determined by discounting the flow of income (or imputed services) by interest rates of the same maturities as the life of the asset. No one, to my knowledge, employs overnight interest rates -- such as the fed-funds rate -- to determine the capitalization rate of real estate, whether it be an office building or a single-family residence. The Federal Reserve became acutely aware of the disconnect between monetary policy and mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004. Moreover, the data show that home mortgage rates had become gradually decoupled from monetary policy even earlier -- in the wake of the emergence, beginning around the turn of this century, of a well arbitraged global market for long-term debt instruments.

U.S. mortgage rates' linkage to short-term U.S. rates had been close for decades. Between 1971 and 2002, the fed-funds rate and the mortgage rate moved in lockstep. The correlation between them was a tight 0.85. Between 2002 and 2005, however, the correlation diminished to insignificance. As I noted on this page in December 2007, the presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005.

That decline in long-term interest rates across a wide spectrum of countries statistically explains, and is the most likely major cause of, real-estate capitalization rates that declined and converged across the globe, resulting in the global housing price bubble. (The U.S. price bubble was at, or below, the median according to the International Monetary Fund.) By 2006, long-term interest rates and the home mortgage rates driven by them, for all developed and the main developing economies, had declined to single digits -- I believe for the first time ever. I would have thought that the weight of such evidence would lead to wide support for this as a global explanation of the current crisis.

However, starting in mid-2007, history began to be rewritten, in large part by my good friend and former colleague, Stanford University Professor John Taylor, with whom I have rarely disagreed. Yet writing in these pages last month, Mr. Taylor unequivocally claimed that had the Federal Reserve from 2003-2005 kept short-term interest rates at the levels implied by his "Taylor Rule," "it would have prevented this housing boom and bust. "This notion has been cited and repeated so often that it has taken on the aura of conventional wisdom. Aside from the inappropriate use of short-term rates to explain the value of long-term assets, his statistical indictment of Federal Reserve policy in the period 2003-2005 fails to address the aforementioned extraordinary structural developments in the global economy. His statistical analysis carries empirical relationships of earlier decades into the most recent period where they no longer apply.

Moreover, while I believe the "Taylor Rule" is a useful first approximation to the path of monetary policy, its parameters and predictions derive from model structures that have been consistently unable to anticipate the onset of recessions or financial crises. Counterfactuals from such flawed structures cannot form the sole basis for successful policy analysis or advice, with or without the benefit of hindsight. Given the decoupling of monetary policy from long-term mortgage rates, accelerating the path of monetary tightening that the Fed pursued in 2004-2005 could not have "prevented" the housing bubble. All things considered, I personally prefer Milton Friedman's performance appraisal of the Federal Reserve. In evaluating the period of 1987 to 2005, he wrote on this page in early 2006: "There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind."

How much does it matter whether the bubble was caused by inappropriate monetary policy, over which policy makers have control, or broader global forces over which their control is limited? A great deal. If it is monetary policy that is at fault, then that can be corrected in the future, at least in principle. If, however, we are dealing with global forces beyond the control of domestic monetary policy makers, as I strongly suspect is the case, then we are facing a broader issue. Global market competition and integration in goods, services and finance have brought unprecedented gains in material well being. But the growth path of highly competitive markets is cyclical. And on rare occasions it can break down, with consequences such as those we are currently experiencing. It is now very clear that the levels of complexity to which market practitioners at the height of their euphoria tried to push risk-management techniques and products were too much for even the most sophisticated market players to handle properly and prudently.

However, the appropriate policy response is not to bridle financial intermediation with heavy regulation. That would stifle important advances in finance that enhance standards of living. Remember, prior to the crisis, the U.S. economy exhibited an impressive degree of productivity advance. To achieve that with a modest level of combined domestic and borrowed foreign savings (our current account deficit) was a measure of our financial system's precrisis success. The solutions for the financial-market failures revealed by the crisis are higher capital requirements and a wider prosecution of fraud -- not increased micromanagement by government entities.

Any new regulations should improve the ability of financial institutions to effectively direct a nation's savings into the most productive capital investments. Much regulation fails that test, and is often costly and counterproductive. Adequate capital and collateral requirements can address the weaknesses that the crisis has unearthed. Such requirements will not be overly intrusive, and thus will not interfere unduly in private-sector business decisions. If we are to retain a dynamic world economy capable of producing prosperity and future sustainable growth, we cannot rely on governments to intermediate saving and investment flows. Our challenge in the months ahead will be to install a regulatory regime that will ensure responsible risk management on the part of financial institutions, while encouraging them to continue taking the risks necessary and inherent in any successful market economy

President Barack Obama said after a meeting with Treasury Secretary Timothy Geithner that the U.S. and other Group of 20 nations must seek agreement on a coordinated response to the global economic crisis. "A strong U.S. economy will help their economy, so they’re rooting for our success," Obama told reporters at the White House, citing his talks with world leaders including Prime Minister Gordon Brown of Britain last week. "We’ve got to make sure we’re rooting for theirs as well." Obama said he’s "optimistic" that a common approach can be found, even though European Union governments have rebuffed U.S. calls to take more fiscal stimulus measures.

Geithner leaves the U.S. tomorrow for a meeting of finance ministers from the world’s developed and developing nations to lay the groundwork for a summit of government leaders on April 2 in London. The agenda includes financial regulation, boosting the resources of the International Monetary Fund and how to revive growth worldwide. Geithner told reporters that G20 leaders have to "bring together a new consensus" on fixing the global economy. "Everything we do in the United States will be more effective if we have the world with us." Obama said the U.S. has two goals for the summit in London. One is to ensure there’s "concerted action around the globe to jump-start the economy." Second, he said, is to "make sure we are moving forward on a regulatory reform agenda" to ensure that these kinds of crises don’t happen again.

European Union finance ministers have rejected calls from the U.S. to pump more money into their economies to battle the global recession. Obama last month signed into law a $787 billion package of tax cuts and new spending to spur U.S. economic growth. Obama said that while there remain differences over what actions are needed, "you’re starting to see a lot of coordination at various levels." The U.S. won’t be able to revive growth in isolation, he said. "If we continue to see deterioration in the world economy, that’s going to set us back," Obama said. For example, U.S. exports had been a bright spot in the American economic picture until recently, he said, and "that has now gone away" as other economies have contracted and credit remains locked up.

The International Monetary Fund said in a report last week that only the U.S., Saudi Arabia, China, Spain and Australia are moving toward meeting the IMF’s target of introducing fiscal stimulus equivalent to 2 percent of gross domestic product this year. Germany’s efforts currently amount to 1.5 percent of GDP, which is double what France has passed, according to the IMF. Obama said he is consulting with U.S. lawmakers on a "regulatory framework," building upon Federal Reserve Chairman Ben S. Bernanke’s recommendations yesterday. "That’s not just something we want to do domestically, but we ought to make sure we are coordinating with other G-20 countries," the president said.

Private equity company Blackstone Group LP CEO Stephen Schwarzman said on Tuesday that up to 45 percent of the world's wealth has been destroyed by the global credit crisis. "Between 40 and 45 percent of the world's wealth has been destroyed in little less than a year and a half," Schwarzman told an audience at the Japan Society. "This is absolutely unprecedented in our lifetime." But the U.S. government is committed to the preservation of financial institutions, he said, and will do whatever it takes to restart the economy.

U.S. Treasury Secretary Timothy Geithner plans to unfreeze credit markets through a new program that will combine public and private capital in a fund that would buy bank toxic assets of up to $1 trillion (728 billion pounds). "In all likelihood, that will have the private sector buy troubled assets to clean the banks out in terms of providing leverage ... so that we can get more money back into the banking system," Schwarzman said. He expects the private sector to end up making "some good money doing that," but added there were complex issues on how to price toxic assets. He put part of the blame for the financial crisis to credit rating agencies. "What's pretty clear is that, if you were looking for one culprit out of the many, many, many culprits, you have to point your finger at the rating agencies," he said.

Rating companies have been the focus of intense criticism for their role in granting top "AAA" ratings for complex bonds that later plummeted in value, resulting in subsequent rating cuts, in many cases to junk status. "Once you bought into ... the Triple A paper and it turned out to be paper that was in many situations going to end up defaulting, then you really had the makings of a global problem," he said. Schwarzman said problems were then exacerbated by mark-to- market accounting rules. Those rules ask banks and other financial institutions to price assets at a value related to how they would be sold in the open market.

Blackstone reported a quarterly loss in February after writing down the value of its portfolio and eliminated its fourth-quarter dividend. Asked where was a good place to invest, Schwarzman said it made sense to buy cyclical names, which are less exposed to the economic cycles. He said investors also may find value in debt products, including "senior layers of certain securitizations," where investors can see 15 percent to 20 percent returns, he said. Geographically, he said there were "pockets of strength" in China, which is committed to getting to an 8 percent growth level, and in India, where the economy is slowing but banks are in good shape.

Nobel Prize-winning economist Joseph Stiglitz argues that the only way to fix the world's economic crisis is to act globally. Speaking at the Development Policy Forum in Berlin on Monday he said the reform of the world's financial institutions wasn't going fast enough. The World Bank's finding sounds very dramatic: According to a report issued by the international organization on Sunday, the global financial crisis is particularly hurting developing countries. The study adds that poor countries are often heavily dependent on exports, have no financial reserves and are not being issued any loans. As a result, these countries have no way to fight back against the financial crisis. According to Robert Zoellick, the head of the World Bank, the only solution to this problem is to foster close cooperation between industrialized countries, international financial institutions and private companies.

"The global crisis demands a global solution," Zoellick says. "We need investments in security networks, in infrastructure and in small and medium-sized companies in order to create jobs and avoid social and political unrest." According to Joseph Stiglitz, however, the winner of the 2001 Nobel Prize in economic sciences, the solution lies elsewhere. Speaking at a Development Policy Forum held Monday in Berlin's Federal Ministry of Economic Cooperation and Development, Stiglitz proposed a more fundamental reform of the world's financial institutions, saying the current tempo of reform is "too slow." Stiglitz is a man who knows what he's talking about. The mild-mannered American with the meticulously trimmed beard was one of Bill Clinton's chief economic advisers in the 1990s and former chief economist at the World Bank from 1997 to 2000 (until he resigned in protest).

Stiglitz explained that, in his opinion, today's institutions are not adapted to today's issues. Too many countries are left on the sidelines (at events such as the G-8 and the G-20 meetings) or have too little say (at institutions such as the IMF and the World Bank). As a result, these institutions lack a certain degree of legitimacy. "The UN is the only institution that can push through the necessary measures," Stiglitz said. He also suggested that the United Nations and a world economic council, such as the one Chancellor Angela Merkel proposed in early February at the World Economic Forum meeting in Davos to be an economic analogue to the UN Security Council, should help engineer a global financial system. For Stiglitz, such suggestions aren't meant to be seen as pipe dreams. In fact, as he sees it, the crisis offers an opportunity to turn his proposals into reality. Stiglitz currently chairs the commission of experts charged by the UN to investigate possible reforms to the international monetary and financial system. In early June, the commission is scheduled to submit its proposal at a UN conference. As Stiglitz describes them, the proposals need to be radical because: "We need a new start."

Greater transparency from banks, corporations and other market players will be demanded under the overhaul of the nation's financial rules that Congress is embarking on, but the role of the Federal Reserve is an early sticking point in those plans. "We are going to send a clear message with these modernization efforts: the era of 'don't ask, don't tell' on Wall Street is over," Senate Banking Committee Chairman Sen. Christopher Dodd, D-Conn., said Tuesday at a hearing of the panel examining possible approaches to the massive project of revamping the regulatory regime. The committee heard from experts and interest-group representatives as Fed Chairman Ben Bernanke said the overhaul was needed to strengthen oversight of banks, mutual funds and big financial institutions whose collapse would imperil the entire economy.

Bernanke, speaking in another forum, built on previous suggestions to bolster mutual funds and a program that insures bank deposits, and repeated his call for Congress to create a system to cushion fallout from the failure of a large financial institution. Congress and the Obama administration are starting to craft their strategies for overhauling a patchwork regulatory system that dates to the Civil War. They are striving to erect a new system that will prevent a repeat of the financial crisis gripping the U.S. and the global economy. One leading idea is the creation of a so-called systemic regulator to monitor against the sorts of risks that plunged the markets into distress last year. Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, has proposed the Fed assume that role.

Columbia University law professor John Coffee, said the central bank was uniquely suited to it. All big financial institutions must be subjected to "financial adult supervision" by a single regulator, and the Fed alone is capable of providing that oversight, he said. But Dodd has been cooler to that approach and said Tuesday that puts him in a quandary: "What's the alternative" to the Fed? "I don't bring any ideological framework whatsoever to this," Dodd said of the overhaul effort. What's needed is "a solid, sound system that reflects the times we're in" but is not so rigid that it stifles financial innovation, he added. Damon Silvers, associate general counsel of the AFL-CIO and a member of the panel overseeing the government's multibillion-dollar financial bailout plan, said there were "profoundly important" concerns about having the Fed assume the overarching regulator role.

The Securities and Exchange Commission should oversee any large entity that manages public securities and any contract that touches on them, he said. Sen. Jack Reed, D-R.I., said some form of the so-called "twin peaks" model — the Fed as systemic risk regulator plus the SEC overseeing consumer protection and transparency — likely will be adopted in the overhaul, with changes to the Fed's current charter. But Sen. Richard Shelby of Alabama, the committee's senior Republican, also voiced concerns about the Fed's possible new role. "We can't build a regulator big enough to be everywhere at all times," Shelby said. "Market participants need to do their own due diligence before and after they make an investment decision."

A wave of US companies are suspending payments to their staff 401(k) retirement plans in a bid to cut costs amid the economic downturn. Saks, General Motors, newspaper group McClatchy, clothing company J.Crew, FedEx, UPS, Coca-ColaBottling, Reader's Digest, Motorola, Regions Financial and Sprint Nextel are among the growing list of companies which have suspended contributions. Even the AARP, the influential advocacy group formerly known as the American Association for Retired Persons, will suspend contributions to its staff 401(k) plan from March 22 for the rest of the year.

The growing number of suspensions appears to strike a blow against the viability of 401(k) plans, which were introduced 30 years ago as the main way that Americans should save for retirement, replacing defined benefit pension plans. Companies typically offered to match employee contributions up to 5 per cent of annual salary. The average 401(k) plan at the end of 2007 held about $65,000, but half of them held less than $19,000, according to a trade group, the Investment Companies Institute. They would hold much less today because of stockmarket falls. The suspensions mean that individuals can continue to contribute to their plans, but their companies will not.

Adam Sohn, a spokesman for AARP, said his organisation, which has 40m members aged 50 and over, had fully matched staff contributions up to 3 per cent of annual salary. "We have taken a temporary suspension for the remainder of the year to help with cost containment measures," he said. The AARP, whose revenue comes in part from investment income, also offers its 2,400 staff a defined benefit pension plan. The McClatchy Company, which publishes the Miami Herald, the Kansas City Star, the Sacramento Bee, the Star-Telegram of Fort Worth and 70-odd others, said this week it would suspend contributions to its staff 401(k) plan.

In recent months, companies have also become increasingly less likely to automatically enrol new workers in their 401(k) plan, citing the costs as the main reason, according to a study by Hewitt Associates, a human resources consultancy. "The continued bleak economic outlook is forcing many companies to make difficult decisions with respect to their retirement benefits," said Pamela Hess, Hewitt's director of retirement research. Hewitt estimated that only 5 per cent of large companies would halt 401(k) contributions in 2009, but that could rise to more than 10 per cent in the next 12 to 18 months.

Citigroup Inc. and Bank of America Corp.’s bond prices are sliding on concern that owners of debt issued by U.S. financial firms will be forced to swallow losses if the industry needs another bailout. U.S. bank debt has lost 7.8 percent and yields have jumped to record levels compared with benchmark rates in the past month, even after taxpayers committed more than $11.6 trillion to prop up financial firms. With shareholders almost wiped out at banks like Citigroup and lawmakers resisting more rescues, holders may be asked to swap bonds for new debt that offers reduced interest rates or lower face values, analysts said.

"The bond market is getting more scared every day," said Gary Austin of PDR Advisors in Charlotte, North Carolina, who manages $450 million in fixed-income securities. "At some time, the government is going to say enough is enough, the only way we will give you more cash is if the bondholders have to be hit." Debt investors are an attractive target because of the size of their holdings -- more than $1 trillion just at the four largest U.S. banks -- and because they’ve emerged almost unscathed so far. Since any reduction in debt at a bank helps boost capital ratios, members of Congress including U.S. Representative Brad Sherman, a California Democrat, say it’s time for bondholders to share the pain.

"These banks can go into receivership, shed their shareholders, shed or reduce the amount they owe to their bondholders and come back out much stronger institutions," said Sherman, who sits on the House Financial Services Committee, in a statement to Bloomberg News. More U.S. capital might be offered as part of the package, he said. Yields relative to benchmark rates on bank bonds average a record 8.21 percentage points, 3.63 percentage points more than industrial companies’ debt, according to Merrill Lynch index data. Before August 2007, when the credit crisis began, bank bonds paid spreads less than industrial-related debt.

Standard & Poor’s, which cut Bank of America’s credit rating this month to A from A+, expects the Charlotte, North Carolina-based company to break even this year because it’s hobbled by losses on credit cards and home loans. If it posts a loss this year, more government assistance may be required, raising "the possibility that debt holders could then be required to participate," S&P said in a report. "It’s only intuitive that the government would contemplate the thought, ‘Why are we only putting this on the taxpayer?’" S&P credit analyst John Bartko said in a telephone interview. Scott Silvestri of Bank of America and Danielle Romero Apsilos of Citigroup declined to comment. Bank of America won’t need further government assistance, Chief Executive Officer Kenneth Lewis said in a Feb. 25 interview. The U.S. government is examining ways to further stabilize New York-based Citigroup if needed, the Wall Street Journal reported yesterday, citing people it didn’t identify.

The concern among debt holders is reflected in Citigroup’s $789 million outstanding in 7.25 percent subordinated notes due in October 2010, which fell 6.5 cents today to 70.5 cents on the dollar and have lost 23.2 cents in the past three weeks, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority. That puts the spread over Treasuries of similar maturity at 32.2 percentage points. Bank of America’s 7.4 percent senior subordinated debt due in January 2011 rose 1.2 cents today to 81.3 cents on the dollar. They traded at 98.9 cents about a month ago. Trust-preferred shares of Bank of America and Citigroup are trading at less than 30 cents on the dollar and yielding more than 25 percent because investors anticipate restructuring, said Tim Anderson, chief fixed-income officer at Riverfront Investment Group in Richmond, Virginia.

"The current prices imply that the companies’ equity is worthless, the government’s investment is worthless and subordinated debt holders will lose some of their investment," said David Darst, an analyst at FTN Equity Capital Markets in Nashville, Tennessee. Citigroup, once the world’s biggest bank by market value, dropped below $1 in New York trading for the first time on March 6. The bank jumped 38 percent yesterday in New York trading to close at $1.45 after saying it was having its best quarter since 2007. The stock added as much as 18 percent today, and Bank of America rose as much as 15 percent. Investors have been losing confidence that Citigroup can fully recover after more than $37.5 billion in losses and a government rescue involving $52 billion in preferred shares to boost capital and $301 billion of guarantees on mortgages, junk- grade loans and subprime-tainted securities. The Treasury on Feb. 27 agreed to convert the preferred stock it owned in Citigroup to common shares, gaining a 36 percent stake.

Any so-called "haircut" to bondholders might be patterned after the $38 billion debt swap at GMAC LLC last December, in which investors including Dodge & Cox accepted as little as 60 cents on the dollar. Reducing the debt was supposed to boost the auto and home lender’s capital ratios so it could qualify to become a bank and get access to federal bailout funds. The debt swap achieved only part of its goal after some holders refused to participate, betting correctly that the U.S. would save the Detroit-based lender anyway because its auto loans were needed to keep General Motors Corp. in business. Most U.S. bank debt is held by insurers and foreign investors, with a small portion owned by mutual funds, said FTN’s Darst. The Investment Company Institute, a trade group representing mutual funds, doesn’t keep statistics on fund ownership of bank debt, spokeswoman Ianthe Zabel said.

Investors shouldn’t increase holdings that lack explicit government guarantees because "extreme losses" could force senior creditors to share in bailout costs, JPMorgan Chase & Co. said in a March 6 report by analyst Srini Ramaswamy. Yields on bank bonds relative to benchmark rates have widened even as the U.S. injects capital into financial firms, provides asset guarantees and promises more funding following stress tests, JPMorgan said in the report. "We’re seeing the start of the next leg of the crisis and that’s going to be financial bondholders taking a haircut as lenders default," Mehernosh Engineer, a London-based strategist at BNP Paribas SA, said this week. "There’s been a perception that banks’ senior bondholders are untouchable, but that’s going to change."

Contracts on the Markit iTraxx Financial index of credit- default swaps linked to the senior debt of 25 banks and insurers were more expensive today than the Markit iTraxx Europe corporate index. That hasn’t happened since Lehman Brothers Holdings Inc. went bankrupt in September and, before that, JPMorgan’s takeover of Bear Stearns, according to BNP Paribas. It reflects "systemic stress" in the financial system. Forcing bondholders to take losses could drive the cost of capital higher for banks, said Thomas Atteberry, a portfolio manager at First Pacific Advisors in Los Angeles with $3.5 billion in fixed-income assets. That’s not all bad, he said, because it may help ensure banks don’t do the same kind of "sloppy" underwriting that set off the credit crisis. Investors who choose to lend money to banks like Citigroup, which Atteberry said was poorly run, "should share the pain of a business that’s having to write things off," he said.

Everyone's trying to cut their budget this year, from the White House to big corporations to ordinary citizens. For many Americans, this means making big changes and going without things to which they've become accustomed. For some, the economic downturn means saying goodbye to that icon of American prosperity: their car. "What am I cutting from my budget? Something sad ... my car," said college student Kyle Aevermann, who is trying to sell his Nissan Sentra. Aevermann is having trouble finding a job and knows that selling his car will save him money in multiple ways. Not only will he no longer have a car payment, he won't have to pay for gas, insurance or maintenance. He estimates that gas and insurance alone cost him around $3,000 a year.

"For a college student, that's a lot of money," he said. Aevermann plans to use Zipcar, a short-term rental service, when he needs to drive, and to walk everywhere he can. "Stores are only a mile away. I have legs. I can walk; I can ride my bike," said Aevermann. Another person doing a lot of walking is Hilary Ohm. She's cut her driving down as much as possible since losing her job in October. She no longer drives to work, of course, and since she lives in the small town of Colville, Washington, she's able to walk to go shopping and meet up with friends. "I have found that walking into town every day is a great way to get exercise, meet people and get to know my community better," said Ohm, who carries a backpack to town with her so that she can do the grocery shopping.

She suggests that people who are looking to save money consider moving to an area where most stores and other destinations are within walking distance. "Think about how much gas you use each month. It adds up." "I haven't filled my tank since the middle of December, and I still have about half a tank," she added. It recently snowed in Colville, leaving her car covered in about a foot of snow, but Ohm says she could have just as soon left it that way until spring. Many others are cutting smaller entertainment luxuries, such as restaurants, shopping, vacations and cable TV, out of their budget.

Matthew Colver and his wife love to travel -- they generally go somewhere on vacation three or four times a year -- but in the next year or so, they'll be staying closer to home. "My wife and I were talking about ways to cut back, and she said we take too many vacations. In fact, we're getting on a plane to Hawaii tomorrow," he said. "I like taking lots of vacations, but we've got a lot of bills, so that's where we're going to cut back. We don't have as much money to spend." Colver says their 2009 vacations have already been planned and paid for, but in 2010, they'll probably only plan one. Johni Redd says she's saving thousands of dollars a year by cutting premium features out of her cable and phone services. She still has cable and a cell phone, but has gone down to the basic level of service for both. She also got rid of her land phone line.

"I had way too many features on [the cell phone]," said Redd. "I had gotten into excess consumerism. And did I really need 150 channels that had nothing on them?" Redd also moved closer to work to save on gas money. She estimates that her total savings from all these cutbacks will be close to $4,000 a year. Gina Bock and Jill Pearson are saving by cutting back on all sorts of little luxuries, such as shopping and eating out. "I don't shop anymore ... I really love to shop a lot, so that was the hardest," said Bock, who lost her job three months ago. "My groceries are limited. I only buy bread, milk, cereal." "Cut backs have come in the form of many things, from not eating out nearly as much, to price checking at the grocery store, to no more nail salons or high-end hair salons," said Pearson.

She and her husband own a construction company, and she says business has been slow since the economic downturn. "Basically, we have cut back on things that are unnecessary. We used to just buy something if we wanted it, now we don't. We have everything we basically need, so we are cutting back on the discretionary spending." And when Pearson's husband needed a haircut, he even asked her to do it herself instead of going to a barber. "No worries, he was very pleased!" she said. "It turned out great." Others tried to give up expensive luxuries, only to find that these luxuries had become essentials. Case in point: Robin Savage, who decided to give up something many in the Information Age cannot do without -- her cell phone.

Fed up with hidden fees and high prices, Savage let a friend take over her Blackberry and service plan. The adjustment proved difficult. After only a few days without her phone, Savage said she was going through "complete torture." "They say cigarettes are addictive, but I'm telling you, I think cell phones could be just as bad," she said. "I'm actually losing sleep over it." In the end, the hundreds of dollars Savage said she would save turned out not to be worth it. After just five days without her phone -- "the longest days of my life" -- she gave in and got it back. She said an incident where she went to the wrong restaurant to meet up with friends and then couldn't reach them was the last straw. "It was like being in another world," she said.

President Barack Obama's $3.6 trillion budget designates $36 billion for transportation infrastructure. State governors and legislatures should spend that money wisely -- and even more importantly, they should use the remaining $229 billion they're getting in stimulus money to put their fiscal houses in order. If they don't, they risk burdening their constituents with devastating taxes in the near future. Local and state governments face such peril in part because the federal government is about to saturate the market for U.S.-based debt -- including debt issued by municipalities -- as it props up failed financial institutions and distributes stimulus money. The federal government could overwhelm the credit markets. In the third quarter of 2008 alone, the amount of federal-government debt surged by 39%. This was "the largest quarterly growth rate recorded," the Federal Reserve recently reported.

It likely will get worse. Treasury debt held by investors around the world is slated to surge by 98% between now and 2013. That's overwhelming even in a growing market. It's easy to see how such issuance could engulf demand for other types of private and public borrowing here and around the world. Even if the appetite for total credit-market debt were to increase as dramatically as it did over the past five years -- highly unlikely -- the federal government would be on pace to soak up 22% of that new demand. (The federal government's share before 2008 was just 10%.) In a stagnant or shrinking credit market, private and municipal borrowers would have to fight very hard with Uncle Sam to get attention.

It's also quite possible that demand for U.S.-based debt will shrink overall as China, for one, invests more money domestically with its own stimulus plan. Plus, at some point, global markets are going to worry that if the U.S. can find no more lenders, we won't be able to shrink our debt burden without devaluing our currency. Lower demand in an oversaturated market -- plus the risk of inflation -- means higher Treasury rates, which will push interest rates up for everyone, including corporations and municipalities. If that happens, healthy corporate borrowers might have some flexibility. Multinationals with operations elsewhere and heavy exporters have some choice, however limited, to borrow in other currencies and pay the debt back with revenue generated in those currencies.

Municipal borrowers, on the other hand, are stuck with dollars. Though their investors get huge tax exemptions, those benefits might be overwhelmed by two factors. The first is that global wealth, particularly in high-net-worth, debt-dependent states like New York and California, continues to be destroyed. So there may be less demand for tax-sheltered securities. The second is that if the stimulus retards recovery rather than speeding it up, more municipalities will be at real risk of default. That's dangerous, because right now municipalities are among a few classes of borrowers without a quasi-explicit guarantee from the federal government.If investors decide to demand such a guarantee as municipal finances continue to deteriorate, the government may have a harder time assuaging their fears. The bailout boat is already sinking under the weight of AIG; it may not have room for Arnold Schwarzenegger.

Unfortunately, the stimulus bill will quite possibly retard recovery. The bill encourages yet more spending on education and health care rather than on public works that would improve private-sector productivity. Governors should take these risks seriously. Instead, a few, including New York Gov. David Paterson, have called on the federal government to do more of what it shouldn't: spend scarce federal resources to bail out failed municipal-bond insurers. What Mr. Paterson and his colleagues should do is shout to Washington that reckless federal borrowing hurts the ability of cities, towns and states to borrow, and thus infringes on their own sovereignty. At home, the governors should ensure that they're getting the biggest bang for every stimulus buck by investing in the right public infrastructure, like faster mass transit for productive urban centers. It's a golden hour for governors to make good decisions -- finally -- about how to spend finite money. If they don't, they may pay for their own, and the federal government's, bad decisions over and over again.

When Citicorp and Travelers Group agreed on a historic merger in 1998, the heads of the two companies placed a courtesy call to inform the Treasury Department. Then they held a news conference to suggest that Congress change the law to allow their union. Congress soon complied. It was a signature moment for a bank that has long taken big risks with the conviction that it is irreplaceable. Over the past century, Citigroup has repeatedly launched new strategies to make money, then stumbled and lost money, forcing the government to restore its health. The 1998 merger, an attempt to create a one-stop shop for financial projects, ultimately faltered.

Citigroup, with the help of tens of billions of dollars in government aid, is now dismantling itself, leaving behind a company that will resemble the old Citicorp, a bank focused on serving multinational corporations. The company sits beneath the Treasury's thumb, its actions scrutinized by an angry Congress. Its market value, more than $140 billion at the time of the merger, is well below $10 billion. Ben S. Bernanke, chairman of the Federal Reserve, reiterated yesterday that large banks like Citigroup will receive all necessary public support to survive. Treasury Secretary Timothy F. Geithner repeated the point yesterday on Charlie Rose's television interview show but refused to say that a failure was impossible. Still, the government in recent days has increasingly moved toward a position of guaranteeing the survival of certain private companies, including Citigroup. Citigroup yesterday released a memo by its chief executive, Vikram Pandit, that said it was profitable during the first two months of 2009, its best performance since summer 2007. The stock price rose. "Over time, the markets will recognize the many strengths of Citi," Pandit wrote.

The company was just another New York bank until the last decade of the 19th century, when a new chief executive, James Stillman, began to win the business of an emerging class of giant corporations. Those firms were concentrating the control of American industry -- and eventually global industry -- on the island of Manhattan. Citigroup would prosper as their partner. A pattern was set. The city's business community and the bank would push further than their rivals, and prosper more, and every so often they would stumble badly. "It became a great bank because they were innovators," said Richard Sylla, an economics professor at New York University who specializes in the history of financial institutions. "They were early to become a great corporate bank, they were early to get overseas, they were early to get into the investment banking business, they were early to get into consumer lending."

The company led American banks overseas in 1914, laying the groundwork for its later dominance. It also established a branch in Moscow weeks before Lenin came to power. It established branches in China -- and lost those, as well. And it lost vast sums lending to Cuban sugar plantations. The company responded then, as it would half a century later, by turning to the American consumer. In the 1920s, a new chief executive named Charles Mitchell pushed the company into the business of selling stock to the middle class. Other banks also were starting to sell stock, but Mitchell, known as "Sunshine Charlie," was better at it. The company served as a massive pipeline between Wall Street and investors, and Sunshine Charlie kept driving his sales force right up until the market collapsed.

The company sold $156 million in shares in Anaconda, a copper company, in 1929. Those shares had lost 95 percent of their value by 1933. It also sold $650 million of its own shares in 1929. Those shares lost 85 percent of their value over the same period. After the crash, the government extended critical support to banks, including Citi, then known as National City Bank. Congress also passed a law separating retail banks from Wall Street firms. One of the authors, Sen. Carter Glass of Virginia, cited Mitchell's excesses as an inspiration. "Mitchell more than any 50 men is responsible for this stock crash," Glass said. The intervening years began quietly. The chastened bank limited new lending for more than a decade, investing heavily in government debt during World War II.

But banks exist to make loans, and, in the years after the war, the bank was bursting with the wealth of New York. A new chief executive, Walter Wriston, would lead a new push into foreign markets. One of Wriston's early successes was providing the financing for Aristotle Onassis to create his fleet of oil tankers. But the years of vast profitability would end in massive losses. Citigroup had loaned millions of dollars to developing nations, without particular regard for the likelihood of repayment. For years, the bank avoided a reckoning by making additional loans and deferring unpaid balances. But in 1982, Mexico defaulted on its debt. Wriston responded by declaring that "a country does not go bankrupt." But neither does a country necessarily repay its debts.

Citicorp and other banks faced massive losses, and the U.S. government stepped in to intervene, slowly nursing Mexico and the banks back toward health. In the aftermath, Citigroup again broadened its relationship with U.S. consumers. Wriston's successor was his longtime lieutenant, John S. Reed, who had built his reputation by pushing to open some of the first ATMs and to offer some of the first credit cards. That focus eventually led Reed to merge the company with Sanford I. Weill's Travelers Group, a financial conglomerate that sold insurance, stocks and a wide range of financial products. That would require Congress, at Citigroup's prodding, to undo the Depression-era law, written by Glass in response to the bank's excesses, separating retail and Wall Street banks. Reed and Weill called Treasury Secretary Robert E. Rubin to tell him about the deal, which was the largest corporate merger in U.S. history at the time. Weill said in an interview at the time that the combination would "position this company to be a leader for decades to come."

UBS AG, Switzerland’s biggest bank, posted a 20.9 billion Swiss franc ($18 billion) loss for 2008, more than initially reported, and said it remains "extremely cautious" about the outlook for this year. The full-year net loss widened by 1.19 billion francs from the figure reported on Feb. 10 because of costs to settle a U.S. tax investigation and additional writedowns on securities, the Zurich-based bank said in its annual report, published today. Chairman Peter Kurer and Chief Executive Officer Oswald Gruebel said in a letter to shareholders that earnings will "remain at risk for some time to come" because the "balance sheet remains exposed to illiquid and volatile markets." That outlook contrasts with Citigroup Inc., whose CEO Vikram Pandit sparked a rally in financial shares yesterday by telling staff the bank was having its best quarter since 2007.

"Citibank was saying yesterday that it had exhausted all skeletons in the cupboard and was only left with profits," said Roger Nightingale, global strategist at Pointon York Ltd. in London, in a Bloomberg Television interview. "UBS today said it probably still has some skeletons." UBS rose 24 centimes, or 2.5 percent, to 10.03 francs in Swiss trading, compared with a 5.5 percent advance in Citigroup at 12:36 p.m. in New York. UBS is down 32 percent this year. UBS agreed on Feb. 18 to pay $780 million and disclose the names of about 300 secret account holders to avoid U.S. criminal prosecution on a charge that it helped wealthy Americans evade taxes. The bank also marked down securities that haven’t yet been transferred to the Swiss National Bank’s fund as part of a government aid package following record losses.

UBS hired Gruebel, the former head of rival Credit Suisse Group AG, last month to replace Marcel Rohner as CEO to restore investor confidence. Last week, the bank nominated Kaspar Villiger, a former Swiss finance minister, as a new chairman of its board of directors, replacing Kurer. The 2008 loss is the biggest in Switzerland’s history. UBS amassed more than $50 billion in writedowns and losses since the beginning of the financial crisis, forcing it to raise more than $32 billion in capital from investors, including the Swiss government, and cut 11,000 jobs. Financial institutions worldwide have reported $1.2 trillion of losses and shed more than 284,000 jobs since the U.S. subprime mortgage market collapsed, data compiled by Bloomberg show. The U.S., Britain, France and Germany are among nations that injected billions into banks to prevent a wider financial calamity following the September collapse of Lehman Brothers Holdings Inc.

UBS plans to further cut risks, reduce assets on the balance sheet and lower costs this year to return the bank "as soon as possible to a sustainable level of overall profitability," the letter to shareholders said. While reporting earnings on Feb. 10, Rohner said the bank would have a profit in 2009. Rohner, who was the highest-paid member of the executive board last year, received total compensation of 1.8 million francs. Kurer’s compensation was 1.57 million francs, UBS said. UBS is fighting a U.S. lawsuit that seeks to force the disclosure of as many as 52,000 names of American customers who allegedly hid their Swiss accounts from tax authorities.

The bank said today that net new money at its wealth management Americas unit "remains positive." Those gains have been partially offset by withdrawals at the wealth management and Swiss bank division. The asset management unit is also seeing further client redemptions, UBS said. "UBS still has troubled assets on the balance sheet and problems with asset flows," said Dirk Becker, an analyst with Kepler Capital Markets in Frankfurt who has a "reduce" rating on the stock. Clients of UBS’s money-managing units pulled 226 billion francs from the bank in 2008. In the fourth quarter, the only area where UBS saw an inflow of new money was in the U.S., where the bank hired almost 400 brokers. The bank lured advisers by offering compensation packages of as much as 260 percent of the revenue they brought in over the previous 12 months, two people with knowledge of the matter said last month.

Greg Hayworth, 44, graduated from Syracuse University and made a good living in his home state, California, from real estate and mortgage finance. Then that business crashed, and early last year the bank foreclosed on the house his family was renting, forcing their eviction. Now the Hayworths and their three children represent a new face of homelessness in Orange County: formerly middle income, living week to week in a cramped motel room. "I owe it to my kids to get out of here," Mr. Hayworth said, recalling the night they saw a motel neighbor drag a half-naked woman out the door while he beat her. As the recession has deepened, longtime workers who lost their jobs are facing the terror and stigma of homelessness for the first time, including those who have owned or rented for years.

Some show up in shelters and on the streets, but others, like the Hayworths, are the hidden homeless — living doubled up in apartments, in garages or in motels, uncounted in federal homeless data and often receiving little public aid. The Hayworths tried staying with relatives but ended up last September at the Costa Mesa Motor Inn, one of more than 1,000 families estimated to be living in motels in Orange County alone. They are among a lucky few: a charity pays part of the $800-a-month charge while Mr. Hayworth tries to recreate a career. The family, which includes a 15-year-old daughter, shares a single room and sleeps on two beds. With most possessions in storage, they eat in two shifts, on three borrowed plates — all that one jammed cabinet can hold. His wife, Terri, has health problems and, like many other families, they cannot muster the security deposit and other upfront costs of renting a new place.

Motel families exist by the hundreds in Denver, along freeway-bypassed Route 1 on the Eastern Seaboard, and in other cities from Chattanooga, Tenn., to Portland, Ore. But they are especially prevalent in Orange County, which has high rents, a shortage of public housing and a surplus of older motels that once housed Disneyland visitors. "The motels have become the de facto low-income housing of Orange County," said Wally Gonzales, director of Project Dignity, one of dozens of small charities and church groups that have emerged to assist families, usually helping a few dozen each and relying on donations of food, clothing and toys.

In the past, motel families here were mainly drawn from the chronically struggling. In 1998, an exposé of neglected motel children by The Orange County Register prompted creation of city task forces and promises of help. But in recent months, schools, churches and charities report a different sort of family showing up. "People asking for help are from a wider demographic range than we’ve seen in the past, middle-income families," said Terry Lowe, director of community services in Anaheim, Calif. The motels range from those with tattered rugs and residents who abuse alcohol and drugs to newer places with playgrounds and kitchenettes. With names like the Covered Wagon Motel and the El Dorado Inn, they look like any other modestly priced stopover inland from the ritzy beach towns. But walk inside and the perception immediately changes.

In the evening, the smell of pasta sauce cooked on hot plates drifts through half-open doors; in the morning, children leave to catch school buses. Families of three, six or more are squeezed into a room, one child doing homework on a bed, jostled by another watching television. Children rotate at bedtime, taking their turns on the floor. Some families, like the Malpicas, in a motel in Anaheim, commandeer a closet for baby cribs. The Garza family moved to the Costa Mesa Inn in August, after the husband, Johnny, lost his job at Target, his wife, Tamara, lost her job at Petco, and they were evicted from their two-bedroom rental. Their 9-year-old daughter now shares a bed with two younger brothers, their toys and schoolbooks piled on the floor. The couple’s baby boy, born in April, sleeps in a small crib. Rental aid from federal and county programs reaches only a small fraction of needy families, said Bob Cerince, coordinator for homeless and motel residents services in Anaheim, who estimated the families at more than 1,000.

President Obama’s stimulus package may give hope to more people and blunt the projected rise of families who could end up in motels and shelters, said Nan Roman, president of the National Alliance to End Homelessness in Washington. The package allows $1.5 billion for homeless prevention, including help with rent and security deposits. Schools have made special efforts to help children in displaced families stay in class, and some send social workers to connect families with counseling services and food aid. Wendy Dallin, the liaison for the homeless in one of Anaheim’s seven school districts, said that in the last three months she had learned of 38 newly homeless families, bringing the total she knew of in her district to 376. About 48 of those families are living in motels, Ms. Dallin said, with the rest in shelters, renting a room or garage, staying with relatives or living in cars.

At the same time, in California’s budget crisis, some school social workers are being laid off. By necessity, most cities here have been lax in enforcing occupancy codes. Still, a source of turmoil for motel families is a California rule that after 28 days, residents are considered tenants, gaining legal rights of occupancy. Some motels force families to move every month, while others make families stay in a different room for a day or two. Many motel residents have at least one working parent and pay $800 to $1,200 a month for a room. Yet even those with jobs can become mired in motel life for years because of bad credit ratings and the difficulty of saving the extra months’ rent and security deposits to secure an apartment. Paris Andre Navarro, 47, knows how hard it can be to climb back. She and her husband used to have good jobs and an apartment in Garden Grove, near Anaheim. But they have spent the last three years with their 11-year-old daughter in the El Dorado Inn.

The bottom fell out when her husband’s medical problems forced him to leave his job as a computer technician and her home-care job ended. They were evicted and moved into the motel, and she started working the night shift at Target. Last year, when Ms. Navarro’s husband started a telemarketing job, they thought they might escape. That hope evaporated when her hours at Target were cut in half. What with the $241 weekly rent, the cost of essentials and a $380 car payment, they cannot save. "Now we’re just living paycheck to paycheck," Ms. Navarro said. Their daughter, Crystal, tries to sound stoical. "What I miss most is having a pet," she said. The motel does not allow pets, so she gave away her cat and kittens. Greg Hayworth, whose family has spent six dispiriting months in the Costa Mesa Inn, tried working in sales but has had trouble finding a lasting job.

Paul Leon, a former nurse who formed the Illumination Foundation to aid motel families, has promised to help with a security deposit when the Hayworths are able to move out. Mr. Hayworth’s teenage daughter has had the roughest time because of the lack of privacy. She is too embarrassed to take friends home, and is uncomfortable dressing in front of her brothers, who are 10 and 11. Not long ago, she was attacked at school by classmates who mocked her for living in a motel. "I’d promised my daughter that we’d be out of here by her birthday," Mr. Hayworth said. "But that came last week, and we’re still here." "It really hurt me the other day," he added. "My son came home and asked, ‘Are we homeless’? I didn’t know what to say."

California lost the most jobs of all the states, 79,300, in January, while Michigan registered the highest unemployment rate at 11.6 percent, the Labor Department said on Wednesday. South Carolina followed Michigan with an unemployment rate of 10.4 percent. Rhode Island, which had its highest unemployment rate on record, was third at 10.3 percent. Besides losing more jobs than any other state, California had an unemployment rate of 10.1 percent, compared to the national rate of 7.6 percent that month. Since January 2008, the Pacific coast state shed nearly a half million jobs -- the largest decrease in the country -- as a devastated real estate market and government standstill pushed more and more people out of work.

With 49 states reporting monthly unemployment rate increases and 42 states saying they had lost jobs in January, there were few bright spots in the report. The largest over-the-month increase came in Maryland, which gained 6,000 jobs, followed by its neighbor, Washington, D.C., which acquired 5,800 jobs. President Barack Obama was inaugurated that month, bringing staff and governmental workers to his new administration. Washington is hoping federal agencies will have to hire workers in order to implement the recently enacted stimulus plan and therefore push those numbers even higher as the year goes on. Despite the gains in January, the nation's capital still had an unemployment rate of 9.3 percent.

Four states -- California, South Carolina, Michigan and Rhode Island -- registered double-digit unemployment rates in January, a trend likely to be seen on the national level by year-end. The U.S. Labor Department's report on state unemployment, released Wednesday, showed the increasing damage inflicted on workers and companies from a recession, now in its second year. Some economists now predict the U.S. unemployment rate will hit 10 percent by year-end, and peak at 11 percent or higher by the middle of 2010. In December, only Michigan had a double-digit jobless rate. One month later, four states did and that doesn't count Puerto Rico, which saw its unemployment rate actually dip to 13 percent in January, from 13.5 percent in December. California's unemployment rate jumped to 10.1 percent in January, from 8.7 percent in December, as jobs have disappeared in the construction, finance and retail industries.

Michigan's jobless rate jumped to 11.6 percent in January, the highest in the country. The second-highest jobless rate was South Carolina at 10.4 percent. Rhode Island was next at 10.3 percent, which marked an all-time high for the state in federal records dating to 1976. California rounded out the top four. The U.S. unemployment rate, released last week, rose to 8.1 percent in February, the highest in more than 25 years. Employers are laying off workers, holding hours down and freezing or cutting pay as the recession eats into sales and profits. Disappearing jobs and evaporating wealth from tanking home values, 401(k)s and other investments have forced consumers to retrench, driving companies to shrink their work forces. It's a vicious cycle in which all the economy's problems feed on each other, worsening the downward spiral.

As the normally hot spring selling season begins, two houses in the Inland Empire region of Southern California sum up the big problem facing many of the nation's largest home builders. One of the houses, a four bedroom built in 2006 that was seized by a lender in a foreclosure action, is listed for sale at $229,900. Meanwhile, in the same housing development, D.R. Horton Inc. is trying to sell a new house that looks nearly identical for $299,000, or 23% more. Or consider Pulte Homes Inc.'s predicament in Henderson, Nev., near Las Vegas. The builder is trying to sell a new, four-bedroom house for $214,990, while a home owner is trying to dump a similar house, which Pulte built two years ago, for $149,999. That price is less than the owner's mortgage under a "short sale" approved by the lender.

In many markets, "we are no longer competing with other builders. We are competing with foreclosures," said Steve Ruffner, president of the Southern California division of KB Home. Sales of used homes are actually rising in some regions because of foreclosures, but new-home sales fell to a four-decade low in January, down 77% from their peak in summer 2005. Altogether, home builders sold houses at a seasonally adjusted annual rate of 309,000 units in January, down from a peak of 1.4 million in July 2005. Home builders are confronting the competition from foreclosures at a difficult time in their history. Small builders are dying by the dozens, while some large companies are staying afloat by cutting expenses and scrambling to restructure debt.

President Barack Obama's foreclosure-prevention plan is likely to help stem the supply of bank-owned houses somewhat, and the administration's proposed budget would extend builders a lifeline through a lucrative tax break. But the foreclosure problem won't disappear. "I don't know how the builders are going to compete," said Credit Suisse analyst Daniel Oppenheim, who downgraded his ratings for Centex Corp. and D.R. Horton stock last week, partly out of concern about foreclosure competition. The problem is particularly vexing because many buyers are bypassing new houses for foreclosed ones that are virtually new and are often located in the companies' own developments. "Buyers think they are going to get the best bargain with a foreclosed house, and they aren't even looking at new homes," said Graham Holmes, owner of Reviron Realty, which sells bank-owned properties in the Inland Empire.

Home builders' responses to the foreclosure threat vary. Los Angeles-based KB Home is focusing on building smaller, lower-priced houses that can compete with foreclosures head on. The builder has shrunk its house size from an average of 3,200 square feet during the housing boom to an average of 1,600 square feet in many markets today. "We're finding that if we can get a product to market that is priced competitively with foreclosures, [we] can sell pretty well, even in these times," said Jeffrey Mezger, KB's chief executive. Dallas-based Centex, on the other hand, says it's not trying to beat lenders on price. Instead, the nation's third largest builder by volume is trying to entice buyers with perks like mortgage interest rates as low as 4.25%, energy-efficient designs and warranties.

D.R. Horton also offers incentives, including covering the buyer's closing costs, and touts a $10,000 California tax credit for buying a new house. And it notes that buyers often need to spend money to fix up foreclosed properties before they can move in. Builders also argue that while they may look alike, new and foreclosed houses aren't comparable. "Our brand-new homes appeal to the buyer who wants up-to-date features, a chance to make their own selections like carpeting and paint colors," a Pulte spokesman said. Some buyers clearly agree. "A foreclosure is like a used car," said Danny Hernandez, who bought a new, $237,000, five-bedroom KB house in Beaumont, Calif., in the hard-hit Inland Empire. Mr. Hernandez, a 41-year-old warehouse worker, said the fact KB paid his closing costs and a nonprofit group subsidized his down payment helped make the sale.

Another strategy: build in new neighborhoods that aren't filled with vacant, bank-owned houses. "In general, we try not to compete with foreclosures," said Centex Chief Executive Tim Eller. "It's not all about price, it's about value. Buyers determine value by the look and feel of the neighborhood." KB said its smaller houses are selling well, but the prices keep sinking. In November, KB was selling its line of smaller houses at a development in Beaumont for as little as $207,990. Now, it has dropped its starting price to $169,990 to match recent foreclosure values in Beaumont. Since it opened the Highland Vista development last summer, KB has sold 28 homes out of about 110 house lots. Analysts question how low builders can go before building a house costs more than they can charge for it. In some markets in California and Florida, builders have reached that point and have stopped building.

The latest U.S. government budget projects a staggering deficit of $1.75 trillion this year, and publicly held debt is expected to expand by $9.57 trillion, to $15.37 trillion, over the next decade. But as the U.S. government commits its full faith and credit to stemming financial panic and restoring the nation’s economy — and by extension that of the world — to vigorous health, its standing in the eyes of investors is plumbing unprecedented depths.

As revealed in the semiannual Institutional Investor Country Credit survey, the U.S. sees its creditworthiness drop by 5.0 points, to 88.0, on a scale of zero to 100. It now ranks No. 15 among the 177 countries in the survey, one place behind Belgium, a debt-plagued and barely governable state that might cease to exist if Flemish and French-speaking separatists had their way.

Creditworthiness has declined around much of the world, too, as the U.S. subprime crisis has morphed into a global recession. Survey respondents mark down nearly every industrialized country in North America, Western Europe and Asia. Even most emerging-markets economies, which many had thought immune to U.S. woes only a year ago, suffer significant declines. The ranking, which Institutional Investor has been publishing since 1979, is based on a survey of senior economists and risk analysts.

The old adage is that buying shares in a falling market is rather like trying to catch a falling knife. Trying to judge in advance when the much-vaunted moment of maximum pessimism has finally hit home is also pretty much impossible. Nevertheless, Tuesday was another demonstration of the fact that although we are undoubtedly still trapped in a bear market there are glimmers of optimism that occasionally shine through the economic clouds. Still more remarkable was the fact that share prices climbed in spite of a barrage of yet more dismal economic news. For while hopes about the future of Citigroup helped buoy the financial side of things, there was unremitting gloom on the nuts-and-bolts side of the economy.

First there was the industrial production data, which underlines the fact that although this started off as a financial crisis it has well and truly metamorphosed into a fully-fledged economic and manufacturing collapse. Meanwhile, the National Institute of Economic and Social Research has done its calculations and worked out that the economy has now effectively given up all the growth it achieved since summer 2006, contracting by a full 4.3pc since the peak in April 2008. The simple truth, then, is that the recession is deepening. Having slashed his economic forecasts by more than any Chancellor in modern history last November, Alistair Darling will have to take a knife to them again at the Budget next month.

Meanwhile, the feel-bad factor will intensify later this year as the final, lagging manifestation of recession – unemployment – properly takes hold. In previous downturns the market has tended to pick up before the wider economy, and although this ought to be the case again this time around, the scale of the economic contraction is such that it is probably too early to hope that the worst is now through. Remember that throughout the early 1930s there were a series of major "suckers' rallies" which were later given up as the economic gloom continued. Some may take some solace in the fact that economies other than the UK are suffering a similarly dismal fate – indeed although the UK's manufacturing production is down by the biggest amount since at least 1968, our neighbours in France, Germany Italy and Japan have all suffered even worse.

The IMF may be warning about a "Great Recession", but its prediction that the UK would suffer more than anyone else in the G7 looks wide of the mark. Moreover, even China – the great hope for the world economy - has now slid into deflation. Its industrial production is sliding perilously. Trying to wring any consolation from this is futile, since the deeper they plunge, the worse will be the consequences for everyone else, including the UK. Catching a falling knife is one thing. Trying to catch 20 of the things as they hurtle down towards you is quite another. Take care before leaving cover.

Investors from New York to London grew more convinced stocks will extend their 17-month decline, with pessimism in the U.S. climbing to the highest since the Standard & Poor’s 500 Index entered a bear market in July. Participants in the Bloomberg Professional Global Confidence Survey predict losses in the next six months for the S&P 500, Brazil’s Bovespa, Mexico’s Bolsa, the U.K.’s FTSE 100, Germany’s DAX, the Swiss Market Index and Spain’s IBEX 35. Users in Italy, France and Japan turned less bearish while still predicting declines. The 2,457 responses between March 2 and March 6 followed the worst start for S&P 500 in its 81-year history.

The benchmark index for U.S. equities has lost 54 percent since its October 2007 record as a deepening recession spurred companies from New York-based JPMorgan Chase & Co., the largest U.S. bank by market value, to Fairfield, Connecticut-based General Electric Co., the biggest makers of jet engines, to cut dividends. Warren Buffett said this week that the economy has “fallen off a cliff,” while economists in a monthly Bloomberg News survey predicted the U.S. jobless rate will reach 9.4 percent this year. “It’s like an earthquake, what we have at the moment, and the ruins could be tremendous,” said Emmanuel Soupre, a fund manager at Neuflize OBC in Paris who participated in the survey. “I can buy stocks, but only selectively, because I have a long- term horizon.” His company oversees $18 billion.

The poll was conducted before stocks around the world staged the biggest rally of the year yesterday as New York-based Citigroup Inc. said it’s having the best quarter since 2007, spurring optimism that the worst of the banking crisis is over. Indexes in all 10 nations in the survey except Brazil have plunged more than 16 percent since the end of 2008 as global credit-market losses at financial firms climbed to almost $1.2 trillion and companies from London-based Anglo American Plc, owner of the world’s biggest platinum producer, to Nissan Motor Co., Japan’s third-largest carmaker, in Tokyo missed analysts’ estimates. The Bloomberg confidence index for U.S. equities posted the biggest decline among the 10 countries, dropping 14 percent to 29.5. A reading below 50 indicates investors expect stocks to retreat in the next six months, while readings above 50 mean they anticipate a rally.

The S&P 500 may still be expensive even after its slump to a 12-year low this week. The index is valued at 13.9 times earnings, according to data compiled by Yale University Professor Robert Shiller that measure equities against a decade of profits. At the bottom of the three recessions since 1929 that lasted as long as the current one, the average ratio fell to 8.74. “It’s very difficult to see the economy pulling out of the current slide in the short term,” said Mark Bon, a London-based fund manager who helps oversee about $750 million at Canada Life. “It’s too early to try to see if company valuations actually mean anything.” Spain was the only country in which concern was greater than the U.S., with the reading decreasing less than 1 percent to 29.3.

Spain’s unemployment, the highest in the European Union, increased for the 11th month in February. The confidence index for U.K. stocks slipped 9.6 percent to 29.6. Edinburgh-based Royal Bank of Scotland Group Plc posted the biggest loss in British history last month, while London- based HSBC Holdings Plc announced last week the U.K.’s largest rights offer to bolster capital after subprime losses curbed profit. Germany, Mexico Respondents also grew more convinced that the Swiss Market Index and Germany’s DAX will decline. Switzerland’s reading slid 4 percent to 36.1, while the German confidence gauge fell 2.6 percent to 33.1.

The reading for Mexico-based participants slipped 0.9 percent to 33.7, while Brazil’s figure dropped 9.9 percent to 42.1. That was still the second-highest after Italy. Brazil’s Bovespa erased its 2009 drop yesterday on speculation that bigger interest-rate cuts are in store after data showed the economy shrank the most on record last quarter. Italian, French and Japanese investors became less bearish. The confidence level in Italy climbed 5.3 percent 44.9, while it increased 0.9 percent to 35.8 in France and 1.5 percent to 37.1 in Japan. Italy’s S&P/MIB is valued at 4.8 times the earnings of its 40 companies, the cheapest ratio in western Europe, data compiled by Bloomberg show.

Confidence in the world economy waned in March as the recession proved deeper than forecast and the U.S. mounted new rescues of financial institutions, a survey of Bloomberg users on six continents showed. The Bloomberg Professional Global Confidence Index fell to 5.95 from 8.5 in February. A reading below 50 means pessimists outnumber optimists. Sentiment about Europe and the U.S. slid, while respondents in Asia were less pessimistic about their region, the survey showed. German factory orders fell 38 percent in January from a year earlier, the government said today. The global economy may shrink for the first time since World War II, with trade collapsing by the most since the Great Depression, the World Bank said this month.

The erosion of confidence in the financial system is exacerbating the decline; U.S. banking stocks are down 25 percent since the last survey despite a third effort by the government to help Citigroup Inc. "The financial crisis and the economic recession are feeding on each other, and that’s adding to pessimism," said Martin van Vliet, an economist at ING Bank in Amsterdam who took part in the survey. "We’re still in no man’s land waiting for stimulus packages to take effect. The light at the end of the tunnel is still far away." A measure of U.S. participants’ confidence in the world’s largest economy dropped to 5.2 from 8.6, the survey showed. Sentiment declined in most other markets, with the index for Italy dropping to 5.5 from 9.3. The gauge for Western Europe fell to 8.2 from 9.1.

The survey of more than 3,600 Bloomberg users was conducted between March 2 and March 6. Since the previous survey, President Barack Obama signed into law a $787 billion stimulus package, the European Central Bank and the Bank of England cut rates to record lows and more Americans filed for jobless benefits than at any time since 1982. European governments have committed more than 1.2 trillion euros ($1.5 trillion) to protect their banking systems and leaders pledged to spend a combined 200 billion euros to try to lift their economies out of the worsening slump. Asia-Pacific nations have announced more than $700 billion in such plans. The measures have failed to boost confidence that they will spur a recovery in growth. Global stock markets have lost $5.9 trillion this year, after about $28.7 trillion was wiped from the value of world equities in 2008.

The U.S. government, which has channeled $45 billion into Citigroup, agreed to a third rescue on Feb. 27 that will give it a 36 percent stake in the lender. Once the world’s biggest bank by market value, Citigroup fell below $1 in New York trading last week for the first time. Citigroup shares jumped 38 percent in New York yesterday after Chief Executive Officer Vikram Pandit said the bank was profitable in January and February and is having its best quarter since the third quarter of 2007. Bank of America Corp. has also received $45 billion of bailout funds, while the government committed more money to avoid a collapse of American International Group Inc. "There’s still concern about failures" of banks, said Jonathan Basile, an economist at Credit Suisse Holdings USA Inc. in New York, a survey participant. "If any of these policy actions don’t work, given the environment, we have to expect more to be done in any way, shape or form."

Confidence also worsened in the U.S. as employers eliminated 651,000 jobs last month and the unemployment rate rose to 8.1 percent, the highest level in more than a quarter century. More than 103,000 individuals and companies in the U.S. filed for bankruptcy in February, according to a private report. "The same old pressures of lacking corporate demand, waning consumer demand are really driving the bus in the U.S. downturn," said Guy LeBas, chief economist at Janney Montgomery Scott LLC in Philadelphia, and a survey participant. "Most of the world is following suit." The situation isn’t better in Western Europe. Manufacturing orders in Germany, its biggest economy, collapsed in January as exports plunged. They dropped almost two fifths from a year earlier and 8 percent on the month, four times as much as economists forecast. "The annual slump is absolutely catastrophic," said Alexander Koch, an economist at UniCredit MIB in Munich. "The extent of declines is terrifying." The ECB last week said the euro-region’s economy may shrink as much 3.2 percent this year, three times worse than expected. It lowered its main refinancing rate by 50 basis points to 1.5 percent on March 5 and wouldn’t rule out more reductions.

In Latin America, confidence rose to 11.6 in March from 10.4 percent last month, while the index for Asia increased to 12.7 from 11.6. The reading for Japan fell to 4.5 from 5. Respondents around the world still expect short-term interest rates to fall, the survey showed. The majority of Bloomberg users from Mexico City to Madrid became more pessimistic on stocks, the survey showed. The MSCI World Index has dropped 14 percent in the past month. The U.S. dollar may rise in the next six months against the world’s most active currencies, with the index climbing to 53.4 compared with 50.2 in February, the survey showed. Users in Japan are now almost evenly divided on the direction of the yen against the dollar compared with February, when the majority expected an appreciation. U.K. participants expect the pound to weaken against its U.S. counterpart.

A look at economic developments and stock market activity around the world Tuesday:

LONDON -- Industrial production in France, Britain and Sweden slumped by more than anticipated in January, official figures showed, further underscoring the scale of the recession hitting the continent's hard-pressed manufacturers. In France, the statistics office Insee said industrial production plunged by 3.1 percent from the previous month, way more than analysts' expectations of a much more modest 0.5 percent decline. Meanwhile, Britain's Office for National Statistics said manufacturing output dropped by 2.6 percent during the month, more than double market expectations, while Sweden's SCB statistics reported a 2.5 percent decline, more than the 2 percent expected. The FTSE 100 index of leading British shares closed up 172.83 points, or 4.9 percent, at 3,715.23

BEIJING -- China's consumer prices fell in February, adding the threat of deflation to the nation's economic woes, and officials warned the next few months look grim as the global downturn worsens. The 1.6 percent drop in the consumer price index highlighted weakness in the world's third-largest economy as exports and consumer demand cool. Such a decline, if it continues, can drag down growth if consumers put off purchases in expectation of lower prices, forcing companies to cut wages and investment. The government downplayed the likelihood of a deflationary spiral. A fall in consumer prices will be a relief to struggling Chinese households. But deflation could undermine the 4 trillion yuan ($586 billion) stimulus, which aims to reduce reliance on exports by encouraging China's own consumers to spend more. Shanghai's benchmark advanced 1.9 percent. Elsewhere in Asia, South Korea's Kospi added 1.9 percent to 1,092.20, while Australian and Singapore benchmarks also rose.

FRANKFURT -- The Bundesbank, Germany's central bank, said it booked a 46 percent profit increase for 2008, but warned that the country's economy faces significant risks as global demand for its exports weakens. Bundesbank President Axel Weber said the bank expects the German economy to contract for longer, and more sharply, than previously forecast. Meanwhile, Weber, also a governing council member of the European Central Bank, said he would like the euro area's main interest rate to be cut no further than to 1 percent. Germany's DAX ended 194.95 points, or 5.3 percent, to 3,886.96.

MILAN -- Italy's Banco Popolare became the first Italian bank to seek state aid to strengthen its capital base, announcing it will issue bonds to the government. The Verona-based bank said it intends to sell euro1.45 billion ($1.85 billion) of convertible bonds to the government "to ensure adequate capital to the group, allowing it to reinforce support to families and small and medium-size businesses." So far, none of Italy's bigger banks have sought any government aid.

TORONTO -- Prime Minister Stephen Harper said Canada will emerge from the global financial crisis faster than any other country, but there won't be a recovery until the U.S. financial system is repaired. Canada has avoided government bailouts and has not experienced the failure of any major financial institution.

TOKYO -- Japan's Nikkei 225 stock average fell 31.05 points, or 0.4 percent, to 7,054.98 -- the lowest closing level since Oct. 6, 1982 when the index finished at 6,974.35. Asian markets in Malaysia and the Philippines also were lower.

SAO PAULO -- Latin America's largest economy shrank in the fourth quarter of last year compared to the previous quarter as the global economic crisis put a halt to Brazil's business boom. The economy contracted 3.6 percent from October to December compared to the third quarter, Brazil's IBGE statistics agency said. It was the biggest decline since Brazil started compiling the information in 1996. Overall, Brazil's economy expanded 5.1 percent in 2008, but most of the gains came during first three quarters of the year as Brazil rode an unprecedented economic boom. Investors shrugged off the news. Sao Paulo's Ibovespa stock index gained 4.3 percent in afternoon trading. Elsewhere in Latin America, the IPC index in Mexico was up 3.2 percent, while Argentina's Merval gained 4.7 percent.

PARIS -- The global economy will shrink this year as the world enters "a great recession," the head of the International Monetary Fund said. Speaking in a taped interview with French television channel France 24, Dominique Strauss-Kahn said economic data has worsened since January, when the IMF forecast global growth in gross domestic product of 0.5 percent this year. On Sunday, the World Bank said the global economy will shrink this year for the first time since World War II and that the global financial crisis will make it tougher for poor and developing nations to access needed financing. France's CAC-40 rose 144.39 points, or 5.7 percent, to 2,663.68.

KUALA LUMPUR, Malaysia -- Malaysia's government unveiled a massive 60 billion ringgit ($16.2 billion) economic stimulus package, but acknowledged the export-dependent nation may not be able to avoid a recession and mounting job losses. The package is in addition to 7 billion ringgit ($1.9 billion) of stimulus spending announced in November. Finance Minister Najib Razak said the government has slashed its economic growth forecast. It expects the economy will shrink 1 percent in the worst case scenario and grow 1 percent in the best case scenario. It earlier expected 3.5 percent groth this year.

BRUSSELS -- European Union finance ministers agreed to urge governments to double the International Monetary Fund's resources to $500 billion and give it a key role overseeing risks to the global economy. They also pledged to start reducing their budget deficits by 2011 at the latest to try and stabilize their economies.ALMATY, Kazakhstan -- Oil-rich Kazakhstan will spend $930 million this year on fighting rising unemployment as the global financial crisis continues to take a toll on Central Asia's largest economy, a senior minister said. Deputy Prime Minister Erbol Orynbaev said the money will be used to finance retraining programs for unemployed workers and provide support for ailing domestic companies.

BUCHAREST, Romania -- Romanian officials said they are in talks with the European Union and the International Monetary Fund for rescue loans that news reports said could reach euro19 billion ($24 billion). Western financial analysts said the expected influx of capital would calm fears of an immediate meltdown, but would not eliminate the need for a steep depreciation in the Romanian currency, the leu, which has plummeted by 20 percent in the last year. Romanian President Traian Basescu and National Bank Governor Mugur Isarescu warned that there would be zero growth this year. Meanwhile, ailing U.S. carmaker Ford Motor Co. will receive euro143 million ($182 million) in aid from the government of Romania, where the company owns a carmaking plant, lawmakers said.

DUBAI, United Arab Emirates -- Dubai Islamic Bank said it has foreclosed on a real estate project and set aside cash to help cover losses after court papers indicated the bank was the victim of a half-billion dollar fraud. Documents filed with the Dubai public prosecutor's office and reviewed by The Associated Press name seven businessmen allegedly involved with the crime, which is said to have cost the bank $501 million. The suspects include three Britons, two Pakistanis, one Turk and one American. The amount of the alleged fraud is far larger than in two other cases that have been referred to court since the booming Gulf city-state launched an anti-corruption investigation last year.

HONG KONG -- Struggling banking giant HSBC Holdings PLC, seeking $17.7 billion in fresh capital, sought to reassure nervous investors after a dramatic plunge in its share price that sparked a Hong Kong securities watchdog probe. The sudden drop that left HSBC's stock down 24 percent Monday at its lowest close since 1995 has shaken the former British territory, where the bank has deep roots and has been seen as a blue-chip investment by generations of retail buyers. On Tuesday, the shares rebounded 13.9 percent to 37.6 Hong Kong dollars. The bounce helped the benchmark Hang Seng index, which added 349.47, or 3.1 percent, to 11,694.05.

Disagreements between the European Union and the US over how to combat the global recession widened on Tuesday as EU governments made clear they had little appetite for piling up more debt to fight the collapse in output and jobs. Finance ministers from the 27-nation bloc insisted in Brussels that it was doing enough to support world demand and did not need at present to adopt another fiscal stimulus plan, as Washington is urging. The US-European differences are casting a shadow over next month’s summit in London of leaders from the G20 group of advanced and emerging economies, an event to be attended by Barack Obama on his first visit to Europe as US president.

It also emerged that Gordon Brown, UK prime minister, was struggling to organise the summit. Britain’s most senior civil servant claimed it was hard to find anyone to speak to at the US Treasury. Sir Gus O’Donnell, cabinet secretary, blamed the "absolute madness" of the US system where a new administration had to hire new officials from scratch, leaving a decision-making vacuum. "There is nobody there. You cannot believe how difficult it is," he told a conference of civil servants. The critical condition of Europe’s economy was underlined by official data on Tuesday showing French industrial output fell at a year-on-year rate of 13.8 per cent in January, the worst fall since records started in 1991. Despite the gloomy figures, stock markets around the world rebounded strongly. In New York, the S&P 500 index surged 6 per cent by mid-afternoon, while the FTSE Eurofirst 300 index of leading European shares gained 5.3 per cent. France, Germany and Italy, the eurozone’s three biggest countries, are anxious that the 16 countries sharing the euro should not run up ever-bigger budget deficits and public debt, potentially threatening the stability of the single currency area.

Mr Brown is more enthusiastic about a possible second stimulus package, and his government is placing less emphasis than Germany on the need for a prompt return to balanced budgets once economic recovery is under way. Even so, the UK signed up to the joint EU finance ministers’ statement, which said: "The focus should now be on swift implementation of planned fiscal stimulus packages to avoid that the recession becomes entrenched. Once the recovery takes hold, an orderly reversal of the macroeconomic stimuli is warranted." Ben Bernanke, chairman of the US Federal Reserve, warned on Tuesday against expecting too much from the G20 summit on April 2. "I think it’s asking too much for a meeting like that to come out with detailed proposals in many different areas," he said. "I think the better goal for a meeting of leaders would be, as much as possible, to establish some principles that would guide reforms around the world."

The industrial downturn is accelerating and the British economy is on course for its worst year since 1931, the latest official figures suggest. The Office for National Statistics reported yesterday that manufacturing output fell by 6.4 per cent in the three months to January – an even faster rate of decline than the 4.9 per cent contraction seen in the quarter to December. The motor industry was one of the hardest-hit sectors – output falling by 10.6 per cent during the quarter. Overall, the annual rate of decline in output has reached an alarming 12 per cent.

Analysts were shocked by the figures, as they point to a GDP decline in the early part of this year that may prove even steeper than that seen during the last few months of 2008, when GDP shrank by 1.5 per cent. The research firm Capital Economics said that the trends could point to GDP contracting over 2009 by "4 per cent or so". Such a result would rank as the country's worst year for economic growth since 1931 – which saw a fall in excess of 5 per cent, the collapse of a Labour government and ushered in a miserable decade of mass unemployment and hunger. A 4 per cent slide would easily beat the post-war record of a 2.1 per cent slump, set in 1980.

David Kern, the chief economist at the British Chambers of Commerce (BCC), said of manufacturing: "The sector has so far failed to benefit from the sharp falls in sterling. The critical priority is to ensure that the vital skills base is not lost during this recession. Urgent measures are needed to help viable and well-managed firms hold on to their trained and skilled employees." The National Institute for Economic and Social Research, which enjoys an enviable record for accurate forecasting, warned that the economy's decline is gathering pace. In its estimate, output fell by 1.8 per cent in the three months ending in February, after a fall of 1.7 per cent in the three months ending in January. The NIESR says that the level of economic activity has now fallen back to the August 2006 levels and is 4.3 per cent below its peak of April 2008.

More job losses were announced yesterday. The design and engineering consultancy Scott Wilson confirmed up to 350 UK jobs cuts and announced a salary freeze for the remaining UK staff. Meanwhile, hundreds of jobs were in jeopardy at Wrekin, a Midlands construction group which employs 600. It has gone into administration. Only a few months ago there was widespread belief that the worst of the downturn could be limited to the financial sector, and that manufacturing in particular would benefit from the slide in the value of sterling – down about a quarter on the summer of 2007. Yet the ONS data shows that industry is failing to respond to that and the various stimuli applied by the authorities in recent months – interest rate cuts, tax reductions, public spending increases and the recapitalisation of the banks.

Output slumped by 2.9 per cent between December and January alone. Almost every sector contracted – only the production of petrol was significantly ahead, with food and drink a little up. The steel industry was down 11.4 per cent and the timber trade down 10.4 per cent. Amit Kara, an economist at UBS, concluded: "We expect manufacturing to struggle in spite of the more competitive exchange rate. Indeed, we know that demand prospects are significantly more important for export demand that the exchange rate – five times more, on our estimate. That pessimism is echoed in the major business surveys including the Chartered Institute of Purchasing and Supply, the CBI and the BCC, which point to a deceleration in domestic as well as export demand."

In next month's Budget, the Chancellor is expected to downgrade his forecast for 2009's growth of 1 per cent, set in last November's pre-Budget report – and generally viewed as ludicrous in current conditions. A much more severe contraction would place even more stress on the UK's public finances. Yesterday, the accountants PricewaterhouseCoopers revealed a "fiscal gap" of about £43bn in the Treasury's plans. PwC added: "It is likely to require a combination of severe public spending restraint in the next Comprehensive Spending Review alongside significant tax increases in 2011 beyond those in the pre-Budget report."

Investors flocked to sell government bonds to the Bank of England on Wednesday as it launched its quantitative easing programme to expand the money supply and breathe new life into the UK economy. The Bank was inundated with 10.5bn of offers to sell gilts five times more than the allocated 2bn the central bank had wanted to buy in an early sign of success. The Bank also managed to buy the bonds at around prevailing market prices, which was also seen as a success with some analysts warning ahead of the auction that the central bank could be forced to pay a big premium to purchase the securities.

The June long gilt future, one of the best gauges of sentiment in the government bond markets, initially rose 10 basis points after the announcement. The yield on the key benchmark 10-year bonds remained steady at around 3.07 per cent, more than half a percentage point lower than last Thursday before the Bank announced its plans to buy up to 75bn of gilts over the next three months. Sterling was little changed against the dollar at $1.3787. The Bank bought paper in six government bonds of maturities between five and nine years, with most of the bids being made for the five-year and the nine-year securities. There were no non-competitive bids, which would have given an investor a guaranteed sale of their securities for the average price in the auction.

However, bankers cautioned against reading too much into this, saying it was probably because most investors wanted to see how the first auction went before making such bids. Bankers also warned that the central bank may have to pay a big premium to buy bonds in future as investors might not be so willing to sell for market prices in coming auctions. John Wraith, of RBC Capital Markets, said: "Investors would have been happy to sell bonds at market prices as yields have fallen so sharply in the past week. In future, they may want a better price."

The Bank of England today officially launched quantitative easing - effectively printing money - to pull the economy out of recession but its first offer to buy UK government bonds drew no response from non-bank institutions such as pension funds and life insurers. The central bank will now offer to buy £2bn of gilts from banks in the next stage of its £75bn asset-buying programme. Results of that are expected after 14:45 GMT. Strategists said they were not that surprised due to the complexity of the process, and gilt prices rose as it raised the stakes for the next so-called reverse auction. "I don't think you can read a huge amount into it. The participants are still getting used to the new system," said Sean Maloney, fixed income strategist at Nomura.

John Wraith, head of sterling rate strategy at RBC Capital Markets, agreed. "I think there wasn't much of a rush given it's going on for the next few months. I don't think it's the end of the world," he said. Central banks around the world will be eager to see how successful the BoE's efforts are in bringing down market interest rates, boosting demand and encouraging banks to lend. The Wall Street Journal reported that the Federal Reserve had been struck by the early apparent success of the BoE's quantitative easing plans - 10-year gilt yields have fallen to record lows since it announced the purchases last week - and the US central bank could move towards a similar effort.

As gilt yields have plummeted, corporate bond spreads have widened, leading some analysts to question whether the BoE should be paying more attention to bringing down the cost of corporate borrowing. Policymakers have been forced to consider unconventional policy action to stave off a global economic slump because official interest rates are nearing zero and there is some doubt over how effective further rate cuts would be. The BoE has cut rates to a record low of 0.5pc in response to a sharp downturn. Britain's economy shrank at its sharpest pace since 1980 in the three months to December. The central bank hopes that by buying up bonds, making yields fall sharply, it will make it cheaper for companies to borrow on the capital markets. Institutions that have sold gilts to the BoE, meanwhile, will have extra money to lend.

Conventional assets – even gold – are no good as hedges against the inevitable deflation, says one asset manager. At the end of last week, gilt prices soared and yields fell again. The market reacted positively to the Bank of England's announcement of quantitative easing. Yet in the preceding days and weeks the market had been spooked by concerns that the bail-outs would create inflation. Why the sudden change in sentiment? It has long been our view that inflation scares have been seriously overstated and the real risk is deflation. Deflation occurs when a shrinking economy leaves businesses and consumers who have already borrowed heavily earning less and therefore unable to afford their existing debts. There is the danger of a downward spiral caused by less income to pay interest. This is what the authorities are trying to avoid. In a deflationary environment, only fixed-coupon gilts prosper: even index-linked stocks are ineffective. This is because the real rate of interest (nominal interest less inflation) has historically been around 2pc to 3pc for centuries.

If prices are falling rather than rising, fixed-coupon gilts gain in value, whereas the indexation formula for index-linked gilts indexes downwards with no floor. Other asset classes such as shares, property and many commodities depend on the continued take-up of more credit – which is why they did so well for many years. As the credit crunch proceeded, governments introduced more and more bail-outs to keep banks lending. Real money, which has to be raised by increased taxation or by selling new gilts, was spent. This gave rise to fears that excess supply would depress gilt prices. Yet events show that the fears were mistaken. There are a number of reasons for gilt prices rising as supply expands:* The biggest beneficiary of lower interest rates is government, as lower rates cut the cost of servicing the national debt;* Pension funds are willing buyers and therefore absorb any supply offered to them;* Risk elsewhere leads to a flight to quality and safety, irrespective of price.

In addition, the Treasury have been selling new gilts to the market through the Debt Management Office's auction programme in order to fund the Government's spending. This takes cash out of the economy, yet the Bank of England wants to buy gilts back to put public money into the economy. If the policy works it may ameliorate the recession, but the result is that the Bank of England counteracts the effect of the Treasury's extra supply of gilts. Being realistic, there are many reasons why this quantitative easing may be of only cosmetic effect: why should banks lend to over-indebted businesses and consumers? What if they just run down their derivatives positions further? Banks and building societies have to hold capital in reserve to ensure they can meet any losses. Historically, they had significant holdings in gilts and deposits at the Bank of England, but over the past 30 years standards were relaxed and other types of debt security were brought into those reserves.

Now they are rediscovering the advantages of having highly saleable assets such as gilts in their core capital and are therefore willing buyers of government bonds. Such bank purchases are significant, just as pension funds will be material buyers when they opt for certainty instead of risk to stem their losses in stock markets. These large investors are the only ones who can sell to the Bank of England, yet they have good reasons for being net buyers. However you look at it, institutional demand is increasing no matter what the supply of gilts. Nearly 20 years ago, in the recession of the early 1990s, the Government sold more gilts and prices rose (yields fell), in that case from around 13pc in 1990 to around 9pc in 1993. Inflation then was around 10pc and about to fall sharply. Notice the parallels as inflation now threatens to turn into deflation, the Government issues more gilts and prices rise again. Investors have been pursuing property and gold for protection against financial risk. But property is an inflation hedge, not a deflation hedge, since its price level depends on the continued supply of credit.

There are also demographic factors that have favoured property in the postwar years but now turn against it: the lower birth rate, extensive owner occupation and the shift from net immigration to net emigration. Add this to the current financial pressure, and you can see why property is no longer a viable investment. As for gold, it is the ultimate inflation hedge, since easy money provides the fuel for more people to buy it. But it is not a deflation hedge, for one simple reason. No currency is exchangeable into gold and no government is going to wreck its country's economy by adopting a gold standard. This explains why the gold price perks up occasionally then always slips back again. The safest asset in the financial system is the promise of government to honour its own debt. Private investors need to go with the flow. Investing in stock markets, like property, is proving singularly unrewarding at present. We believe the bear markets have much further to run before shares and property are cheap enough to buy again. Since income offered by gilts is still above that earned from many bank accounts and there is a continuing flight to quality, gilt prices must go on rising until this deflation is over. Investors should change to a gilt-only strategy to preserve capital and income. This way, they will have the cash to buy the bargains when stock markets offer them.

The UK trade deficit widened in January although it narrowed over a three month period, fuelling expectations a lower pound should boost exports. The trade deficit in goods and services rose to £3.6bn in January from £3.2bn in December, driven by a sharp drop in exports to countries outside the European Union that was not matched by falling imports, the Office for National Statistics reported on Wednesday. Over the three months to the end of January, however, the trade deficit narrowed to £10.3bn from £11.1bn in the previous three months. Citing the volatility of monthly data, leading economists expect the trade deficit to continue to contract in the longer-term as a weaker pound helps to support exports, while falling domestic demand – and the higher prices in sterling of foreign goods – reduces imports. "Imports seem likely to fall even more than exports over the coming months due to substantially contracting UK domestic demand as well as the reduced competitiveness of foreign companies resulting from the sharply weaker pound," said Howard Archer, economist at IHS Global Insight.

But at the moment there are few signs that a weaker sterling has boosted exports. "Export and imports are still both retreating - there is certainly no sign of a pickup in overseas demand just yet," said Colin Ellis, economist at Daiwa Securities SMBC. Total exports of goods fell by 4 per cent in January, due to much weaker sales of cars, as well as reduced sales of consumer and capital goods. Imports of goods however fell by just 1 per cent. Exports of goods to the EU were up 6 per cent, but outside of the EU, they fell by 16 per cent. Imports from non-EU countries fell by just half a per cent. Over the last three months, exports to the US have fallen by more than 10 per cent, but imports have actually risen by almost 3 per cent. The UK economy has been less hard hit by declining exports than other major economies. Japan and Germany, which are more reliant on manufacturing and exports have seen huge drops in exports, helping to pull their economies into deep recessions in spite of less fragile financial systems than in the UK.

Germany is braced for another quarter of severe recession after manufacturers booked 8 per cent fewer orders in January than in December, dragging the total new order volume 35.2 per cent below the level seen at the start of last year. The size of decline – the fifth in as many months – caught economists by surprise and led many to predict Germany’s economy would shrink at least as much in the first three months of this year as it had in the fourth quarter of 2008. Many recently believed the first quarter drop in gross domestic product would ease. But Jörg Kramer at Commerzbank said recent data suggested it would now shrink "at a similar pace" to the 2.1 per cent decline seen in the previous quarter.

German authorities on Monday said exports were 4.4 per cent lower in January than the month before and 20.7 per cent lower than shipments at the start of 2008 – another clear sign of the hit Germany’s export-dependent is taking. Alexander Koch at UniCredit spoke of an "absolutely ugly outlook" for Europe’s largest economy as industry was set to contract in the first months of the year . "There is no convincing argument yet for a stabilisation thereafter," he said. A few weeks ago economists and business people expected the German economy to be over the worst by the second half of the year. But a consensus now appears to be building that any kind of recovery will not be seen before next year.

Hungary’s economy contracted faster than at any time since 1990 in the final quarter of 2008, according to data released by the government on Wednesday. The economy shrank by 2.5 per cent year-on-year and by 1.3 per cent compared to the previous quarter, more than projected earlier, implying a contraction of 5 per cent in 2009. Output declined in all sectors of the economy except for construction and agriculture, with industrial output falling by 10.7 per cent year-on-year, because of a sharp fall in demand from the eurozone coupled with domestic fiscal tightening.

Inflation slowed to 3.0 percent in February from 3.1 in January. But it was well above expectations for a 2.8 per cent figure as a result of dramatic falls in the Hungarian forint. Currency falls also fuelled inflation in Romania, where inflation stood at 6.9 per cent year-on-year in February. Hungary’s bleak growth figures followed a turbulent week for the region during which authorities repeatedly resorted to verbal intervention to discourage panic selling. Last week, financial regulators were forced to issue a statement confirming that the country’s banking system remained stable, while earlier this week the central bank finally announced that it was prepared to use any means to support the currency.

The forint hit an all-time low of 317 against the euro earlier this week, down from 290 one month ago. By Wednesday the forint had recovered to 300 against the euro. Neil Shearing, an economist at the London-based consultancy Capital Economics, said: "During Hungary’s last fiscal tightening in 2006 and 2007, the eurozone was ticking on nicely, which kept the whole country from slipping into recession." Central and eastern Europe has been in turmoil over the past month as investor confidence in the region’s ability to weather the financial crisis has declined. On Tuesday Romania became the fourth country in the region to request international aid, when it formally applied to the European Union to start negotiations on a support package which officials have said could be as large as €20bn.

China exports dropped an "ugly" 25.7% in February after January's 17.5% fall. The government is trying to boost domestic spending to alleviate the pain. New data about is providing further evidence that the global recession is making the once mighty Chinese export machine sputter badly. After falling 17.5% in January, exports plunged a further 25.7% year-on-year in February, the government announced on Mar. 11. The drop was worse than what most analysts expected; a Merrill Lynch research note described it as "an ugly number." And the way things are shaping up in the rest of the world, the figure for this month isn't going to look very pretty either. While stock markets across most of Asia rallied on the strength of the previous day's rebound in the U.S., the Shanghai Stock Exchange fell 0.91%.

The poor export performance casts serious doubt on China's ability to meet the government's growth forecast for 2009. While Premier Wen Jiabao last week, in a speech opening the National People's Conference in Beijing, predicted the Chinese economy would be able to achieve 8% growth, many outside economists are less upbeat. The International Monetary Fund has projected Chinese economic growth of just 6.7% this year, but other estimates are far more pessimistic. The export numbers overshadowed a bit of good news about China's economy that came out at the same time. Beijing also released data on fixed asset investment, which climbed 26.5% during the first two months of the year. The rise reflects a government spending spree on infrastructure as part of the $585 billion fiscal stimulus package unveiled last November.

But so far there is little evidence of a pickup in private sector investment, as most companies have adopted a wait-and-see attitude rather than invest in new plants and equipment. Indeed, some analysts believe the easy credit extended so far this year has been used by companies to speculate in the stock market, which is up more than 17% year-to-date. China's economy, meanwhile, faces the problem of falling prices. This time last year, inflation was raging at double digits due to high food and energy prices. Today, inflation has been entirely tamed: The consumer price index actually fell 1.75% in February year-on-year. However, as Jing Ulrich, managing director and chairman of China equities at JP Morgan (JPM) points out in a note, deflation is undesirable when it builds in expectations of further price declines, thus leading consumers to defer purchases.

Like other Asian countries, China is looking for ways to get people to spend in hopes of offsetting plunging foreign demand. The eastern Chinese cities of Nanjing, Hangzhou, and Ningbo, for instance, have spent millions distributing coupons to consumers for use in hotels, restaurants, and tourist destinations. But, given health, education, and retirement benefits that even government officials admit are inadequate, convincing Chinese consumers to open their wallets during these uncertain times is a huge challenge. "First, we need to have a healthy and complete social security system," Commerce Minister Chen Deming said in a Mar. 7 China Central Television interview. "Only when people feel that they have basic security…will they be willing to spend money." Beijing still has plenty of ammunition to stimulate the economy. JP Morgan's China chief economist and head of equity research, Frank Gong, agrees that China needs to spend more on the social safety net before the Chinese will abandon their thrifty ways.

"Consumer coupons are better than cash because you get people to spend first before they get the cash back," he says. "But they should do more, spend more money to build national pensions, health care insurance, and unemployment benefits." Although Chinese Premier Wen did not unveil additional spending in his speech last week, the Chinese government has nearly $2 trillion in reserves and a debt-to-GDP ratio of just 18%, compared to 80% in the U.S. and Britain and 160% in Japan. China's trade travails are problem enough for Beijing to be sure, but the export plunge in the mainland spells even more trouble for neighboring countries like Japan, South Korea, and Taiwan that provide much of the inputs assembled in China and re-exported to Europe and North America. "We can only hope and pray for some sort of a miracle in the U.S. and Europe coming to grips with financial systems, recapitalizing the banks and starting lending," says Supavud Saicheua, Thai economist at Merrill Lynch.

It is, on the face of it, merely a supremely ambiguous phrase of bureaucratic Japanese — but it is threatening to plunge the country's welfare system into chaos and create a national "fire sale" of everything from violins to motorbikes. Trying to make sense of it are the burgeoning ranks of unemployed Japanese seeking to tide themselves over with money provided by the State. Their task: to pare down their lives so that their homes contain only "reasonable items". Their problem: nobody knows what constitutes "reasonable".

Here lies a grey area that places huge discretionary powers in the hands of the welfare inspectors, many of whom will not even hand out the application form if they believe that the benefit-seeker possesses any "luxurious" items that may be sold for hard cash. Thus applying for welfare in Japan is much like declaring personal bankruptcy in the West. Musical instruments, cars, jewellery and a selection of non-specific "unnecessary" household electronics must be sold or the State's coffers will remain closed. At its worst, the benefit regime could provoke a severe collapse in living standards for households where the main breadwinner has lost his or her job.

To receive welfare cheques, all life insurance policies must be cancelled and applicants must show that they have total bank deposits valued at less than half the size of their monthly benefit. Air conditioners are deemed acceptable, but that is only a recent dispensation after a furious public outcry over the treatment of an elderly woman. Cars, motorcycles and other vehicles may be maintained only by benefit-seekers able to prove — beyond doubt — that they could not realistically find a new job without the means of personal transport. Televisions are viewed as "reasonable", but wait: this is true only if the screen is not too luxurious in size, too big in layman's terms. The bizarre debate over the precise measurement differences between "acceptable" and "excessive" is expected to rage fiercely in welfare offices throughout Japan.

The forecast of widespread confusion and disarray, described last night by MPs within the ruling Liberal Democratic Party, came as record numbers of Japanese are applying for state welfare benefits. In the past, one MP told The Times, Japanese would have applied for livelihood assistance only as a last resort, mainly because there always seemed to be the prospect of another job. "Now those prospects appear to be diminishing every day, people feel they have no other choice." January's 30 per cent rise in applications represents a deluge of financial neediness that Japanese society never expected and the system was never built to support. Although the number of households surviving on the "livelihood assistance programme" — the dole — is low by international standards, the 1.2 million figure reportedly reached in January set a record that economists expect to be beaten with each month as the year wears on.

Japan, the world's second-largest economy, has suffered from the global downturn on several fronts: the collapse of the American and European markets has destroyed exports, while financial mayhem has caused the yen to strengthen with unprecedented speed and in a way that has left even the country's strongest industrial players facing floods of red ink. Jobs have been slashed to keep pace with the rout: the Government estimates that about 158,000 contract workers will have lost their jobs between last October and the end of this month, about twice the figure it was forecasting eight weeks ago.

For all the whiz-bang trading strategies Bernard Madoff said he used to generate his legendary steady returns, the fraud he is expected to plead guilty to was as simple as it gets -- he apparently made up the numbers. Investigators have said they determined that Mr. Madoff made no trades for at least 13 years. Instead, he allegedly took in money from a network of feeder funds and investors and used it to meet any withdrawals his investors requested. If proven, it was a classic Ponzi scheme that stands out mainly for its longevity. Because returns were so steady, investors had little need to redeem their money, and many of them were clients for decades.

As the numbers grew, Mr. Madoff apparently counted on feeder funds that vacuumed up cash around the world. In some cases, the funds claimed to be managing the money but simply passed it off to Mr. Madoff. Mr. Madoff's ability to produce modest but steady returns, typically 10% to 15% annually, was a big attraction for investors at a time when interest rates were low. In the end, the firm sent account statements indicating investors had $64.8 billion invested with Mr. Madoff, including gains made from decades of what appeared to be bogus returns. Based on the evidence, the mechanics of the alleged fraud relied on a finely balanced mix of loyal employees and family, falsified client statements and financial documents, and investors who felt privileged to be clients, so didn't ask too many questions. It took place in the firm's investment advisory business, which was believed to be separate from its original stock-trading operation.

More than a dozen employees dealt with shareholders in the investment operation, sending out tens of thousands of account statements outlining trades that had purportedly been made. An IBM computer located on the 17th floor of the company's headquarters in the Lipstick Building on the East Side of Manhattan helped churn out the statements. Junior employees put the statements in envelopes. This group kept track of Mr. Madoff's investment clients, which numbered in the thousands. It set up accounts and monitored client balances. It provided the clients with market color on how the portfolio was invested. The people who worked in this operation rarely left. According to people familiar with the matter, Mr. Madoff and others working for him would occasionally check to see where various stocks had traded in recent weeks.

In one case, a longtime Madoff associate instructed assistants to produce trading tickets that are now believed to have been falsified, according to people familiar with statements recently given to prosecutors who are trying to determine whether anyone knowingly helped Mr. Madoff carry out his alleged fraud. Several employees have received subpoenas from regulators seeking documents about their dealings with Madoff investors, and at least five have been interviewed by prosecutors, according to people familiar with the matter. The portfolio statements from customers suggested Mr. Madoff employed a strategy known as split-strike conversion, where he would invest in blue-chip stocks and options on those stocks or stock indexes in such a way that the risk of loss was limited but so were potential gains.

That produced modest, steady returns. Account statements showed these trades, though given the amount of money Mr. Madoff was managing, executing that strategy would have overwhelmed the options markets for the contracts he was trading. He created his firm to trade stocks on Nasdaq and attracted many clients based on his reputation as a market-structure expert. The alleged scheme took a turn around 2002, when he began to funnel money from the investment-advisory business to his stock-trading business, according to documents from federal prosecutors unsealed Tuesday. That business had become less profitable as trading fees declined.

72 comments:

MacGee
said...

RE: the living in motels, hidden homeless story

If you follow the link, there is a photo slideshow with audio. Mrs. Hayworth complains that she lost her job because "the system failed to provide her with childcare." Also, according to the story she has health problems--one of which judging by the photos is that she is obese. I'm wondering if the unnamed health problems could possibly be related to her weight?

Re the Navarros--you are living in a motel and have a $380/mo car payment? Are you kidding me?

Why am I not surprised these people are stuck living in motel rooms? I find these kind of stories infuriating--they are intended to drum up sympathy but when you look into the facts, there seems to be a serious lack of responsibility for their own predicament. Got diabetes? Stop eating sugar and start working out. Can't afford $380/mo car payment? Sell it and buy a clunker.

I fully agree with the Telegraph article that there's not enough pessimism out there for a bottom. There's still a lot of denial out there, people are carrying on with their daily lives as if not much has changed. The full implications will only be realized when people start seeing actual, physical shortages of goods as well as forced bank holidays or limits on withdrawals.

ps - Anyone else watch the European soccer tonight? Barcelona and United were brilliant. I noticed all the stadiums were packed to the rafters and these games cost quite a bit. Not much frugality when it comes to football (soccer).

Yes, Friedman is an utter fool. But his despair is precisely what gives one hope. The bankers, industrialists, and politicians will not hold such a meeting, because they don't trust each other, and why should they? It's comical, of course, that Friedman, having carried the neoliberals' water for the past 20 years, and having thus relentlessly undermined trust and public-spiritedness everywhere, now appeals to some kind community ethic among the elite. Oh, the humanity.

The 401K story reminded me of something that I've noticed at my company over the past couple of months (I manage the treasury function)... Employee contributions to the 401K plan have increased by about 30%. I've brought it up to a couple of co-workers, and it appears that the prevailing belief is that this is an excellent opportunity to kick in a little extra now that the market is near a bottom so they can more quickly cover their losses from the past 16 months... Makes me sad to think about it...

In other news, our company earned less than $500.00 interest on $23M in cash I keep in the money market account... Two years ago our interest income was running about $250K a month. Call it the downside of zero interest rates. :-)

Besides that, things are pretty much the same... Our DSO & A/R Balances are creeping up, which suggests that customers are taking longer to pay, but we're OK for the moment. Figured we'd be in worse shape by now.

Picked this up from Amity Shales blog over at council of foreign relations. It seems worthy of posting here in it's entirety. A civil response to an accusation.

Blogs Gone Wildby Benn Steil

“Many of the most successful economics blogs promote communication within political groupings, not across them. On the web you best build an audience by organising a claque and stroking its prejudices. Extend elaborate courtesy to people you agree with and boorish contempt to those who do not get it. Celebrate exasperation and incivility as marks of intellectual authenticity – an attitude easier to tolerate in teenagers under hormonal stress than in professors at world-class universities” (Clive Crook, FT: 8 February).

Two days before Clive’s column appeared, I experienced firsthand the econoblog treatment he describes. On 6 February, I published an op-ed in the FT (“Keynes and the triumph of hope over economics”) criticizing the tendency of economists to invoke Keynes, rather than logic and evidence, in support of any and all forms of new deficit spending, which are now massed together under the cozy umbrella of “stimulus” – a term that closes discussion by simply assuming the merits it claims. This provoked a call for my dismissal from blogger Brad DeLong (a California state employee with lifetime employment). Fellow blogger Paul Krugman, who is apparently too busy to read what he criticizes, then parroted DeLong’s description of me as a “wingnut”, and reprinted DeLong’s curious misstatement of what I’d written, together with a link to DeLong’s blog entry (rather than to my article, of course).

According to DeLong and Krugman, my article says that Jacques Rueff (1896-1978), whom DeLong dismisses as a “French crank,” demolished the foundations of Keynesian economics. Despite my admiration for Rueff, a renowned economist, statesman, and judge at the European Court of Justice, I never gave him such credit. What I wrote was that Rueff had demolished the Keynesian foundations of Krugman’s claim that a trillion dollars of new deficit spending would “employ . . . money that would otherwise be sitting idle.” For those interested in what Rueff actually wrote, it can be found here: “The Fallacies of Lord Keynes General Theory,” The Quarterly Journal of Economics, Vol. 61, No. 3, May 1947, pp. 343-367.

Krugman’s claim, I argued, is manifestly false. Institutions are not hoarding dollar bills, awaiting the issuance of stimulus bonds. Any funds they choose to make available to the government, beyond their current holdings of Treasurys, will have to be withdrawn from the banking system or the market for corporate securities. DeLong retorted that the evidence that Krugman is right is apparent in the fall in monetary velocity. But this is a non-sequitur, since if Krugman had actually been using the word “idle” to mean circulating at low velocity, he would then have been assuming the very thing he needs to establish - that by outbidding the banks and corporate securities markets for funds, and then spending such funds, the government necessarily increases velocity and stimulates private consumption or investment more than it reduces it by withdrawing the funds from the market. This could, of course, be true. The burden, however, is on Krugman and DeLong to make an argument that it is true. They cannot just assert it. This is, after all, what the entire debate is about.

Harvard’s Robert Barro, writing in the 22 January Wall Street Journal, provides logic and offers evidence supporting the case that it is not true. Krugman, naturally, waves off Barro’s views as “boneheaded”.I cannot help but think what Keynes and Hayek, friends who engaged in profound and respectful private and public debate about economic policy for decades, would make of the ugly and childish econoblog culture which Krugman and DeLong have helped create.

Benn Steil is director of international economics at the Council on Foreign Relations, and co-author of Money, Markets, and Sovereignty (Yale University Press).

Christ I hate Harbor Blvd and Costa Mesa in general. The place is so depressing. I drove by that roach motel yesterday on my way back from the big Home Depot across the street.

Here's a link to Google street view for interested voyeurs:http://maps.google.com/maps?hl=en&tab=wl

Regarding looters, I know this web site tends to attract libs, so I'll provide you with an alternative POV: It was the quest to achieve social equity that drove official government policy to encourage mortgaging our productive capital base.

IOW, it was simply a means by which money/credit was funneled to the unproductive & incapable to enable them to contribute and participate in the wonderful consumption driven economy we call FIRE.

Looters merely took advantage of a situation that was ripe for exploitation. I mean, who can blame them? If you had gov't idealists essentially promising billions in backstop guarantees to achieve their dream of an "ownership society", who wouldn't take the money & run?

Now to another point. Both Ilargi & Stoneleigh are fantastic, insightful analysts. Don't they ever get bored recounting the same tired, repetitive stories of the day? We all know the score - it's just a function of the end game slowly (or quickly if things get interesting fast) playing out.

Where's the identification of new trends? Or is this the wrong forum for that type of analysis and/or speculation?

"America's Fiscal Collapse - Obama's Budget Will Impoverish America" with economist and author, Michel Chossudovsky. The administration's 2010 budget will entail the most drastic curtailment in public spending in American history, leading to social havoc and the potential impoverishment of millions of people. Defense spending and bank bailouts will consume all government revenue resulting in fiscal collapse that will lead to the privatization of the state.

Mark to Market is not the issue its about who takes the losses. The government needs to be very clear and it is not, which points in the direction of political corruption.No resolution to the crisis or a move towards a long term economic plan can occur until the political corruption has been resolved and then the financial,political actors responsible need their jail time. Then such accounting issues as mark to market etc can be used to provided a basis for ending the crisis.

So, I've done a bit more reading, but I need your advice. I have a gameplan. If I lose my job or TSHTF, I can move back to my families' homeplace. Self-sufficient farm with well and 3 underground aquifers (Thank goodness) Bad news is so rural - only dial-up :(But, I digress. I have little debt - can get it all paid off in 6 months - or immediately if I cash out my 401 (which I plan to do if this is a significant rally). I would still have significant COH.I'm curious about preparations. It will be a 1000 mi drive.If I lose my job - no problem - I sell what won't fit in my car - and I'm done.But, if TSHTF first, I would like to be more prepared if I have to stay holed up for a while. Also, I'm not sure what to expect in regard to travel hazards.Any suggestions?

Also, props to Stoneleigh for mentioning La Belle Epoque and reminding me to pull out my old notes on Max Weber. ;)

"Looters merely took advantage of a situation that was ripe for exploitation. I mean, who can blame them?"

I blame them. However, you're mistaken if you think I blame republicans more than democrats, or "conservatives" more than "libs". The Washington consensus that has dictated economic policy for the past thirty years doesn't really care about such distinctions, and neither do I. The establishment that agreed upon that consensus and enforced it around the world is what needs to fall.

To your "alternative POV": That is simply laughable. Social equity, seriously? Look at the statistics regarding economic equality over the past thirty years. If your point is that government should not have been involved in trying to get so many people to own homes, then I agree with you, but to suggest that the powerful were motivated by a desire for social equality is just patently ridiculous.

Lastly, you can't conflate money and credit in the way that you do. No one funneled any money to the unproductive/incapable, as you suggest. They funneled credit (irresponsibly) and they kept the money for themselves.

My friends and I share your views regarding the MSM sympathy articles. We are usually staggered by the amount of waste or poor, easily amendable choices we usually find in such articles.

@ Greenpa:

I prefer the term "cargo cult economics" myself.

@ VK:

I wish I could've caught the United match. The victory is even sweeter for me because Inter is my ex's favorite team.

@ TampaSteve:

Stand fast on your 401k. People at my workplace are constantly telling me how I should be pouring money into mine. I like to deflate them by telling them I've got everything parked in the money market fund and am up +0.2% vs. their -25% YTD return. I could take the company match and get 20% growth for the year, but I want the cash to be in my bank account for easier access.

Well just for the sake of speculation and trends, a thought experiment if you will.

What if the US sets up a "Bad Country" on an empty island somewhere. Create an Island Central Bank and Bank Of Island. Than inject 1 trillion USD into that Island's Bank and let that central bank print money like crazy. Let them lever up 100:1 , so that's 100 trillion of purchasing power right there. Let them buy every damn worthless securitized boondoggle on the planet from all the banks.

That way the banks balance sheets are cleaned up. Than the Island's Bank goes down as obviously the assets are worthless. But the world's banks are saved and left with fresh balance sheets. The island basically than returns to being an idyllic paradise gone bust and the world is saved!

I'm sure that the currency of the island will devalue due to the printing but thats the great thing with having an island with no one living on it, they can print to infinity and buy assets at infinity without any cost.

@redcatbiker - Dude, that guy is merely reciting stale information that any casually informed reader of TAE or other financial blogs is well aware.

We have a system completely & utterly dependent on (now cratering) tax receipts generated from income, sales, property & capital gains taxes based on a failed FIRE economic model. So, yeah, we know that entitlements will be cut to -0- and the welfare state itself is going to collapse. BFD, like that's news anymore?

How about engaging in some real interesting speculation? Perhaps as to what does a bankrupt government do in reaction to social unrest? How does it unify the people towards a common purpose? To what degree do we revert to traditional tribal alliances and resume the trend towards territorial conquest?

My take is that we start looking south. It satisfies many libs' desires to provide humanitarian assistance (eg save innoncent people from narco-terrorists). The right doesn't care as long as there is some exchange for value: oil, ports, developable beach front real estate, arable farm land, etc.

A lot of sh!t is going to start hitting the fan soon, and I for one would like to make a pretty penny from the upcoming series of events.

If the SHTF sooner than later, you should be measuring your distance to Texas. I figure I could get there in around 12 hrs from SoCal. Definitely the I-40 - don't wanna get anywhere near the border - especially El Paso.

Once you're in TX, you can open/conceal carry. Personally, as a beach guy, I find the place less than visually appealing, but at least they understand/practice respect & the rule of law. I figure it will be the safest place to be.

Australia's unemployment rate has hit 5.2% after the economy suffered the biggest monthly drop in full-time jobs since 1991.

The jobless rate is now the worst it has been in four years, further proof the economic downturn is getting worse.

Data released today by the Australian Bureau of Statistics show that in February, 53,800 positions were lopped out of the economy but 55,600 part-time positions were created, leaving a net increase of 1800, seasonally adjusted.

Ilargi:Your front page of today’s blog is full of scary news from around the world.The blogsphere has got the message… toxic papers… and are saying it.The goverments have got the message … that we are aware of the problems.Their positions are clear and well articulated.

“Doing nothing is not an option”

“The banks will not be allowed to fail/crash.”

Their intent is to have a controlled soft landing. (The long term results which TAE has been saying are obvious.)

The governments have their paid experts watching what is happening in the stock markets and they are watching the unpaid experts (blogs) to help them track the fast evolving events.

The governments have trillions of dollars to back up any interference that they wish to do to prevent a “crash.” They can even call their interference, or insider trading, a “buying opportunity” and you would never be able to prove it to be anything else.

Let’s take a look at a recent event/crash that got picked up and called by “Genesis”. =====http://market-ticker.org/archives/2009/03/05.html What's Dead (Short Answer: All Of It)Thursday, March 5. 2009)Just so you have a short list of what's at stake if Washington DC doesn't change policy here and now (which means before the collapse in equities comes, which could start as soon as today, if the indicators I watch have any validity at all. For what its worth, those indicators are painting a picture of the Apocalypse that I simply can't believe, and they're showing it as an imminent event - like perhaps today imminent.)Only immediate action from Washington DC, taking the market's place, can stop this, and as I get ready to hit "send" I see the market rolling over again, now down more than 3% and flashing "crash imminent" warnings. You may be reading this too late for it to matter.In 3 minutes, what's coming.....====== Monday, March 9. 2009With a "5" as the first digit on the SPX, which will happen this week at the present rate of change, it is likely too late.With a "3" as the first digit of the SPX it is with certainty.===== The “crash” did not materialize. “Genesis” is pissed off and has as bruised ego, because Citi played a dirty trick … it announced a profit for the first 2 months of this quarter. Money suddenly appeared and saw “a buy opportunity” and drove the market out of their decline and up.

===== Tuesday, March 10. 2009Markets are up + 300 on DOW=======Failing that the whipsaws will continue and each time that occurs liquidity is destroyed by investors discovering to their chagrin that bets they believed were correct in fact were wrong - not due to their lack of analysis, but rather due to the intentional concealment of loss exposure by the firms in which they were invested.

======= Wednesday, March 11. 2009 Not to be outdone, today, J.P. Morgan Chase (?) also announced that it has a 2 month profits.Results ... Markets are still going up ====== Conclusions:The governments can destroy the validity of any short term calls.The blogsphere is being monitored to help achieve a soft landing.Stop crying ... We are, (the blogsphere), all part of the solution.======= jal

@MacGee:"there seems to be a serious lack of responsibility for their own predicament."

Pfft. The buck for this entire mess doesn't stop with the Bankers, the Politicians or the Bureaucrats. It stops with the people. And that includes the majority of the people here, who undoubtedly voted for their incumbents.

This inconvenient truth is never mentioned when it comes to finger pointing. Democrat or Republican, those are just two different PR spins for the exact same party.

@VK:"What if the US sets up a "Bad Country" on an empty island somewhere."

I was thinking about this yesterday as well. Only one doesn't need an island. These Banks are all international corporations.

So, just transfer the bad loans over to a country which you don't like, and declare that subsidiary bankrupt.

That way, not only do you get rid of your bad loans, but you also take out that country and rebuild it the way you like.

In America the worlds greatest athletes are expected to suffer growing pains. In politics no such luxury is afforded, as if the position of President is not an infinitely more difficult task than lining up behind a football center. Or as John Elway did in his rookie year, attempt to take a snap from a guard. Obama is a rookie, and he will suffer through growing pains just like every other President or professional athlete. If President Obama has been overly malleable in his first weeks, or perhaps bends a too willing ear to the whispers of Wall Street, it might only mean terra cotta has not yet transformed to oak. Obama, more and more will find his stride, assert his natural voice and sentiment. At that point those attempting to influence Presidential policy will have to have the best tools of logic and policy; otherwise, oak will rebel furiously against dull tools wielded by the hands of hacks.

Personally, I think Obama is off to a fairly good start even though he his cutting rookie teeth on the most severe economic crisis that anyone has seen in a long time. Obama will have to be a master juggler and some days the balls with feel like iron shot puts. But I sense greatness.

It's going to be a long eight years for the GOP as they gasp for their last dying breaths. The Reagan revolution is over. It ended in the same place it started, California. More and more the demographics of America will resemble the current demographics of Reagan's former state. That's a prediction you can take to the bank.

* Noon Summary changed to Nightly Summary because it confliced with NS's work schedule (PST)* Media finally talking about failing banks and CDS's* Argentina and Uruguay might help the US in a pinch* Citi's stock is a lottery ticket or rather yesterday's lottery ticket; Even so they are still offering loans* Thrill of the game is in the air again* Karl Denninger: - He doesn't handle conflict well - He's brilliant - He needs to check his ego - He tolerates too much anti-social commentary on his boards - His hissy fit is distracting people from the real problems - He is jingoistic and rude - His prediction score is no better than average - His plan is naive and wouldn't stop the depression - He suffers from cognitive dissonance - He is overreacting to Ilargi - He hasn't gotten past the denial stage - He is missing the forest for the trees - His proposal is worth serious discussion - He talks trash - He can't be reasoned with - He is mad because his world is falling away - He can't understand simple concepts like Peak Oil - His rants are never interesting - He doesn't get it - Reading him is like eating 4 day old road kill - He speaks High Gibberish* Ilargi accused of being an alien; Stoneleigh pours oil on troubled waters; Many thanks from readers for TAE in reporting on reality; Don't they get bored covering the same story every day?* Who is calling the shots in corrupt banks? Read creature from Jekyll Island* Justice for Just Us is US mantra; US says do as we say, not as we do* Several Anonymi leaving TAE over Denninger kerfuffle; Denningerphiles can post on TAE but TAEphytes can't post on the Ticker; Pissing match is a distraction; Snarkiness is a great sounding word; Large prostrates hinder pissing matches; Denninger vs. Ilargi is tempest in a TAE pot* Communism and Capitalism both destroy middle class; Need new system for next generation; Liberatrianism is absurd* Domino Theory of Collapse posited: Banking Collapse => Consuming Collapse => Manufacturing Collapse => World Trade Collapse => Tax Revenue Collapse => Bond Collapse => Government Collapse* Zanders voted poster of the day* Friedman to be cast out of Free Trade Garden; His flat earth is about to get rounder; After 20 years of undermining public-spiritedness he now appeals to community; He may need drugs to see him through the change* Homeless living in motels need to be responsible; Liberal doesn't necessarily mean stupid* Economics Replacement Contest: Econ-Astrology; Econonsense; Eonomixup; Economagic; Economucks; Cargo Cult Economics* Looters just took advantage of situation ripe for exploitation; Powerful are not motivated by by a desire for social equity* VK suggests creating an island bank to buy up all bad debt in the world; Then it could go under and all other banks would be saved* Texas may be safest place when TSHTF; Getting a firearm may be good idea

I live in a motel - monthly rent, secure entry, kitchenette, and best of all I'm invisible - no gas/light bill. Houses near where I grew up cost two months of pay now and they're going to slide right down to pocket change before too long. I'll get one, someone with the same last name as me will keep an eye on it, and when this set of circumstances goes south I'll be up there planting and hoeing.

I can hardly stand to look in here any more. I'm back to work after a very ugly year and a half. I can go four hours at a time without recalling how impermanent it all is.

RE: Alan Greenspan's explanation for the current financial crisis. " That declining long term interest rates across a wide spectrum of countries statistically explain,and is the most likely cause of, real estate capitalization rates that declined and converged across the globe, resulting in the housing bubble." Really? So the housing bubble had nothing to do with "liar loans", with negative ams, with Alt A's, with teaser rates, with the alphabet soup of "securitized" debt obligations palmed off to a gullible investor world. So it was this cosmic co-incidence of international low interest rates that caused the bubble. And not the fact that someone making $8.00/hr. could somehow qualify to compete in the purchase of a $500,000 house with someone who qualified under the old rule of thumb of mortgage payments not to exceed 28% of disposable income. See, this is why I never became the head of the Federal Reserve: I cannot comprehend, as you can, that the cosmic confluence of global low interest rates, trumps common sense and historical evidence, every time.

Persephone, Gave this same advice to girlchild living in LA...figure out alternative routes to where you want to be.Drive them once or twice.If possible pick a location around half way and rent small storage area,,,couple cans of fuel,stuff you would like to take..maybe.Long storage bugout bag w weeks supply of food...whatever you would like for a weapon...all half way there..

The link to ferfals diary is a good starting point.[us .gov spent half a mil training me in emergency management...but I learned some good tricks on that blog you wont see in "training"or books.]

Ground zero for AIG's spectacular implosion, which has soaked up more federal bailout money than any other entity, appears to have been a small London branch office that may have lost nearly half a trillion dollars in bad deals. The unit's small group of traders risked nearly half a trillion dollars to insure U.S. mortgages and other debt using complex financial products called credit default swaps, according to recent congressional testimony.

"For about a decade it went OK," Koenig said. "And then, when the U.S. housing market fell out instead, they suddenly realized they had to come up with a half a trillion dollars and all they had was a couple of million in the bank."

Worth it for the additional comments / news items:http://www.housepricecrash.co.uk/forum/index.php?showtopic=107785&pid=1733832&st=0&#entry1733832

The following excerpt struck me:"People, if you are interested in real world SHTF situation and you want to prepare for the real deal, then understand that this isn’t black or white. You wake up one day and listen on the radio that the economy collapsed and that the stock market closed indefinitely. What do you do? You still have to go to the office/work/whatever .Kiss the wife good bye and walk to the office with your AR across your back, or across your chest, Israeli style, and ready to shoot? You won’t get far."

It makes me wonder how much time would we have between the triggering collapse and societal degradation. Collectively, people would have a need to maintain order (and pretend it's not happening), until they realize it's unavoidable. Of course, there are those who will exploit this naivete for personal gain - robbery, etc. FerFAL provides insight for the otherwise vulnerable.

@snuffyGreat idea about establishing a halfway point and plotting different routes (I was actually thinking about that earlier).

I really need to move on getting a handgun, now - while it is not so difficult. My Dad taught me how to shoot (both handguns and shotguns) when I was a teenager. One of those lifeskills I didn't appreciate so much at the time. I currently live in a metro area and unemployment only needs to go up another percent or so before arming oneself becomes necessary, anyway.

Thanks Orion for reposting the link. Must have been a different page the other time. It confirms my fears as how SHTF fairs in a western big metropolis compared to eastern small town. Maybe people should start preparing instead of worrying about over scared people trying to save the day.

After further reading of Weber, I realize he predicted materialism/consumerism. (If memory serves me correctly, he was making the argument against Marxism.) I also have a few books on Émile Durkheim - worth looking into.

Here is a suggestion which you could use if you make the move before the collapse and unrest has proceeded very far. Rent a u-Haul trailer and tow it to your parents' place. This would allow you far geater capacity than just a car, though you didn't mention what sort of vehicle you have.

When my son graduated college in MA and went to stay with me in Denver, I rented a 4X6 from them and towed about 1000 pounds of his gear 2000 miles with a tiny Mazda 323 with a 1600 cc motor. No hay problema.

Well, I did get burned with my SDS but did sell into the market within 10 minutes of the opening before this humungous day rally really got under way.

But what accounts for a 6+% daily rally. With the exception of the leaked memo from Pandit the Bandit, the news was universally gloomy. The MSM ascribed it to the Pandit "leak." One of the more astute market followers here, I forget exactly who, wrote it off to a correction because the market had overshot on the way down and was oversold.

Last night I listened to the Guns and butter interview with Michel Chossudovsky. Very interesting viewpoints marshaled with lots of facts and data. I got the feeling the he believes the collapse was planned from the get go years ago to buy up the world at pennies on the dollar. He mentions on several occasions that all that offshore electronic money is going to buy up hard assets before it collapses through a black hole singularity into an alternative universe.

He also mentions in passing, as a fact so obvious that it need no data support, that the private financial institutions with their trillions of leveraged assets have total control over the market index averages.

But back to the original point. I see three possible factors for this 6% daily rally. However, they are not mutually exclusive and each could form a weighted cause.

MacGee: In your mind, frankly, there's really only one solution for the poor: Remove the privilege of self-determination, and society gets to determine where you live and what job you have.

I could see a definite case where a person in a hotel (a "hidden homeless") would make the car that much a priority. In many areas, you have to "look the part" to even have a job. If their boss knew they lived in that kind of a hotel, chances are they wouldn't have a job.

Denninger thinks removing the so called bezzle will make last week's lows the bottom in this economic cycle. Incredibly naive wishful thinking. He's likely talking his book cause I'll bet he's trapped long somewhere at SP950. Like Starcade said, the bezzle is what is largely behind the rocket ride in the economy in the first place. Denninger just can't accept that fact apparently.

@ persephone:re: " I currently live in a metro area and unemployment only needs to go up another percent or so before arming oneself becomes necessary, anyway."

John Williams, over at http://www.shadowstats.com/ contends that the actual numbers are vastly worse than claimed.

@ el g:

I agree with you completely. A tremendous amount of capital came into the market at the lows with no technical support at all, unless you like indu 6469.75, for some reason. Notice the timing ? The low came in at 1500 est, along with the bond market close. PPT for sure.

The governments are not going to tell the blogsphere what tools they are using to stabilizing the global financial system.The G-7 and the G-20 are cooperating in their efforts.http://www.bloomberg.com/apps/news?pid=20601087&sid=ajv6m8b7WEy4&refer=home Geithner Said to Push G-7 to Ease Criticism of China (Update1) By Rebecca Christie and Michael Forsythe

“China is now playing an important stabilizing role in the global financial system, and Chinese leaders have committed to move over time to a more flexible exchange rate policy,” Treasury spokeswoman Heather Wong said in an e-mail. “As we prepare our foreign exchange report to Congress this spring, we will fully evaluate China’s exchange rate policy, taking in to account the current global economic and financial environment.”

An analysis of the current economic crisis we are all unfortunately facing but looked at from a slightly different perspective.

This analysis looks at past banking crises and how they have effected various aspects of the economy.

It is titled The Banking Crisis - Where are we now? (follow the link should you be interested) and has particularly interesting points about how the previous banking crises has effected assets including property prices.

======= Here is what Karl said:http://market-ticker.org/archives/2009/03/05.html What's Dead (Short Answer: All Of It)Thursday, March 5. 2009)flashing "crash imminent" warnings. You may be reading this too late for it to matter.In 3 minutes, what's coming.....======= It did not happen.Why?I repeat ...The governments are not going to tell the blogsphere what tools they are using to stabilizing the global financial system.The G-7 and the G-20 are cooperating in their efforts.jal

Another indication that it was PPT operating from home base was that all the major world indices were down for the past 48 hours prior to the opening of NY. No real international momentum to indicate a huge day rally. Japan and Europe certainly weren't having a dead cat bounce despite their percentage losses were greater than NY. They shot up after NY exploded.

As to Starcade and the insider trading hypothesis: you can't separate insiders from the PPT with a microtome. I guess you can only do it if you use "insider" to describe a couple of smaller fish in any particular example.

As Red Foxx used to shout as he would clutch his heart in an attempt to manipulate his son, "Elizabeth, I'm coming. This is the big one."

So is this the big one, the long awaited suckers' rally? Inquiring minds want to know. But first we need a definition. So my arbitrary definition is that

1) It must last at least 45 days from trough (Mar 6; 666 - a number buzzards can relate to) to its peak before falling back into the waiting black hole.

2) We must see a trough to peak minimum of at least 250 points.

(Obviously measured in terms of the S&P500)

The fact that Da Boyz obviously catalyzed the send off with the ludricous Pandit memo and most probably some serious leverage in index futures from the PPT, would not negate its "validity." After all, even Bruce Springsteen recognizes that

"You can't start a fire without a sparkThis gun's for hireEven if we're just dancing in the dark"

So cast your votes and let your voice be heard TAEers - is this the big one?

This is the first time I've made a serious post here. I've been a long-time lurker - but! - I've at least offered a week in the south of France [in lieu of payment for all the good work S & I have been doing over the years] - so I feel entitled to let go. At length. Bear with me, please. It's economics, plus a big dose of feminism - but there's a swear-word or two in there too! It's all to do with 'animal spirits' and 'irrational exhuberance'. And how these economists critique it - but can't quite let it go. Oh - and why they really should.

They last spoke four years ago, when Alan Greenspan, worried that stock prices might be getting too high, invited eight experts to Washington to year their views. That was when Robert J. Shiller, a Yale economics professor, warned unequivocally that American investors, caught up in their own fervor, were creating a dangerous bubble.

In his 10-minute presentation, Mr. Shiller said, he never uttered the words "irrational" or "exuberance." "I liked the word 'zeitgeist' in those days, and I probably used it," he recalled. But two days later, on December 5, 1996, Mr. Greenspan, the chairman of the Federal Reserve, wondered in a now-famous speech whether "irrational exuberance" might be infecting the stock market. And Mr. Shiller saw his influence at work.

"He may have had elements of my way of thinking already in his mind, and when he heard my presentation, he may have been persuaded to say a little more in that speech than he would have otherwise," Mr. Shiller said. "That could be how 'irrational exuberance' got from me to him."

Now, though, the phrase has migrated back to Mr. Shiller, who made it the title of a book on the emotional nature of the stock market, written for a popular audience and published must as technology stocks tumbled, launching the markets into their wild April swings. Suddenly, Mr. Shiller, 54, found himself elevated to the status of Wall Street guru. His view that investors are driven by impulse, herd behavior, dinner party chatter, intuition, media hype, fear of being left out — everything, in short, but informed, reasoned analysis — offered a timely explanation for the spreading uneasiness about stocks.

George Akerlof and Robert J. Shiller : Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism, Princeton University Press, 2009, which describes the implications of research in behavioral economics for economic booms, crises and busts.

"The global financial crisis has made it painfully clear that powerful psychological forces are imperiling the wealth of nations today. From blind faith in ever-rising housing prices to plummeting confidence in capital markets, "animal spirits" are driving financial events worldwide. In this book, acclaimed economists George Akerlof and Robert Shiller challenge the economic wisdom that got us into this mess, and put forward a bold new vision that will transform economics and restore prosperity.

Akerlof and Shiller reassert the necessity of an active government role in economic policymaking by recovering the idea of animal spirits, a term John Maynard Keynes used to describe the gloom and despondence that led to the Great Depression and the changing psychology that accompanied recovery. Like Keynes, Akerlof and Shiller know that managing these animal spirits requires the steady hand of government--simply allowing markets to work won't do it. In rebuilding the case for a more robust, behaviorally informed Keynesianism, they detail the most pervasive effects of animal spirits in contemporary economic life--such as confidence, fear, bad faith, corruption, a concern for fairness, and the stories we tell ourselves about our economic fortunes--and show how Reaganomics, Thatcherism, and the rational expectations revolution failed to account for them."

The colourful name that Keynes gave to one of the essential ingredients of economic prosperity: confidence. According to Keynes, animal spirits are a particular sort of confidence, "naive optimism". He meant this in the sense that, for entrepreneurs in particular, "the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death". Where these animal spirits come from is something of a mystery. Certainly, attempts by politicians and others to talk up confidence by making optimistic noises about economic prospects have rarely done much good. [The Economist. A-Z of Economics]what I meant to add was that when Gordon Brown et al say 'we had no idea this would happen' and 'no-one warned us' they are plainly lying. "Spirits' and 'exhuberance' and investment mania and herd instinct have all been discussed from Keynes on, and probably before.

My tuppenny ha'pors worth was simply that all of them blithely overlook the fact that these crises are man-made : literally. They have come about through our inability and unwillingness to deal with uncontrolled testosterone. The term 'big swinging dicks' [cf. Dick Fulds - the Terror of Wall St.] comes to mind here. These are bullies and sociopaths playing in a men-only arena with few restraints, with the lives and hopes and futures of millions of people. Mast(urbat)ers of the Universe.

A recent and highly perceptive article in Vanity Fair [yes - but read via theautomaticearth] on Iceland highlighted this macho world of fishermen-turned-financiers. And how their all-male political party has been dumped - in favour of the all-women political party. Who are left to do the dirty-work of cleaning up the boys' mess all over the stockmarket floor . . .